Question

Ballantine Corp. produces and sells expensive bicycles. It has two divisions, A and B: A produces the bicycle frame, and division B assembles the rest of the bicycle onto the frame. There is a market for both the frames and the final product. The following data are available for each division: Selling price for final product $280 Long-run average selling price for bicycle frame 160 Incremental cost per unit for completion in division B 170 Incremental cost per unit in division A 100 The manager of division B has made the following calculation: Selling price for final product $280 Transferred-in cost per unit (market) $160 Incremental cost per unit for completion 170 330 Contribution (loss) on product $ (50) Assume that division A’s maximum capacity for this product is 2,000 units per month and sales to the frame market are now 1,200 units. Assume that division A will maintain the $160 selling price indefinitely. If division B wants 900 units on an "All or None basis", what should be the minimum transfer price at which Division A is willing to supply B's order?

$100

$16

$106.67

$117.77

Answer 1

Answer: $106.67

Working:

Division A has excess capacity of 800 units (2,000-1,200) so up to excess capacity Division A has to transfer at a price which is incurred as cost i.e. $100

But hear Division B requires 900 units that means for extra 100 units (900-800) Division A loss contribution on their regular sales is $60 (160-100)

So for these 100 units cost incurred would be =100+60=$160

Finally Transfer price per unit:

= (800units*100+100units*$160)900units

= $106.67