Nova Company has two divisions: OPA Division and LPA Division. The OPA Division manufactures a single product, presently operates at 95 per cent of full capacity (100 000 units) and can sell all 95 000 units produced to outside customers. This product is also a component used in a product made by the LPA Division. OPA's full cost of production is $22.50 per unit, including $4.50 of applied fixed overhead costs. The applied fixed overhead is calculated based upon production of 95 000 units. OPA's management believes that production can be raised to 100 000 units without affecting cost behaviour. OPA's selling price per unit is $30 with a 10 per cent sales commission on outside sales. LPA is presently negotiating the purchase of units from OPA. LPA can purchase a comparable component outside for $29.
What is the minimum acceptable transfer price for the first 5000 units from the viewpoint of OPA's management?
A) $18.00
B) $22.00
C) $27.00
D) $27.80

Question

Quizplus · Accepted Answer

The minimum acceptable transfer price is the full cost of production, which is $22.50 per unit.

Nova Company Has Two Divisions: OPA Division and LPA Division