Question

Zeilinger Products, Inc., has a Screen Division that manufactures and sells a number of products, including a standard screen that could be used by another division in the company, the Home Security Division, in one of its products. Data concerning that screen appear below:

Capacity in units		40,000
Selling price to outside customers	$	65
Variable cost per unit	$	28
Fixed cost per unit (based on capacity)	$	26

The Home Security Division is currently purchasing 8,000 of these screens per year from an overseas supplier at a cost of $58 per screen.

What is the maximum price that the Home Security Division should be willing to pay for screens transferred from the Screen Division?

Answer 1

• The Home Security Division is already purchasing 8000 units at the cost of $ 58 from outside.
• It will be beneficial for Home Security Division f it get a transfer price from Screen Division at any price less than $ 58.

This is because it is already paying $ 58 to outside supplier.

Any transfer price above the $ 58 per unit would be disadvantageous for the Home Security Division .

• Hence, the maximum price that the Home Security Division should be willing to pay for screens transferred from screen division = $ 58 per screen. [Total $ 464,,000 = 8000 x $58]