Question

Division B has provided the following information regarding the one product that it manufactures and sells on the outside market:

Selling price per unit (on the outside market)	$	60
Variable cost per unit	$	44
Fixed costs per unit (based on capacity)	$	8
Capacity in units		20,000

• Division C could use Division B’s product as a component part in the manufacture of 4,000 units of its own newly-designed product.
• Division C has received a quote of $58 from an outside supplier for a comparable part

If Division B is currently selling 15,000 units on the outside market, what is Division B’s lowest acceptable transfer price if it were to sell 4,000 units to Division C?

Answer 1

(1) Division C's Highest acceptable transfer price is $58 per unit for 4,000 units from Division B, same as provided by outside supplier

Then, Division A's lowest acceptable transfer price will be calculated as follows when it sells 4000 units to Division B:

Variable cost (4,000x$44). = $176,000

Add: Contribution margin lost. =$30, 000

($60-44)x 5,000

Transfer price. = $ 206,000

(2) Now transfer price per unit = $206,000/4000 =$51.50

(3) Purchase Cost from outside supplier will be

(4000x$58.00) = $232,000

There will be reduction in company profit by $26,000 ($232,000-206,000)