Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest transfer price Division X will accept?
A) $50
B) $49
C) $46
D) $30
E) $20

Question

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:  Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. What is the lowest transfer price Division X will accept?
A) $50 
B) $49 
C) $46 
D) $30 
E) $20

Quizplus · Accepted Answer

Since Division X has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost of $30 per unit.

Division X Makes a Part That It Sells to Customers