Question

Division C makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers	$	44
Variable cost per unit	$	31
Total fixed costs	$	456,000
Capacity in units		28,400

Division D of the same company would like to use the part manufactured by Division C in one of its products. Division D currently purchases a similar part made by an outside company for $43 per unit and would substitute the part made by Division C. Division D requires 5,540 units of the part each period. Division C has ample excess capacity to handle all of Division D’s needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?

PICK 1

• $44

• $43

• $40

• $31

Answer 1

Correct answer-------$31.

.

From the standpoint of the selling division the minimum transfer price will be equal to additional cost that is incurred for production which is variable cost of production.

The loss of contribution due to transfer to Division D will not be considered because division C has excess capacity and it will not loose its regular sales.

The minimum price is always equal to additional cost that will be incurred for the order. In above case only variable cost is additional cost. Fixed cost will not be considered as it remains same in totality whether the transfer is done or not.