Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price?
A) $75
B) $66
C) $16
D) $50
E) $25

Question

Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below:  Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price?
A) $75 
B) $66 
C) $16 
D) $50 
E) $25

Quizplus · Accepted Answer

Because there is no excess capacity in Division M, it should not accept any transfer price less than its selling price of $75 per unit.

Division M Makes a Part That It Sells to Customers