Question

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 60,000 stakes from the Stake Division at $4.05 each. The following data are available for last year's activities in the Stake Division: Capacity in units Quantity sold to outside customers Selling price per stake to outside customers Total variable costs per stake Fixed operating costs 410,000 stakes 350,000 stakes $ 4.30 $ 3.55 $330,000 In order to sell 60,000 stakes to the Solar Light Division, the Stake Division must give up sales of 48,000 stakes to outside customers. That is, the Stake Division could sell 398,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above) if it were not making sales to the Solar Light Division According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? $4.05. O $3.55 $4.15. 0 $4.30.

Answer 1

For outside customer
	($)
Selling Price Per stake	4.30
Variable cost per stake	3.55
Contribution per stake	0.75

To fulfill the demand of Solar light division, the demand of outside customers needs to be foregone which becomes the opportunity cost to the selling division.

Such opportunity cost should also be taken into account while determining transfer price as it reflects the contribution foregone for outside customer sales.

Therefore,

The transfer price will comprise of Variable cost per stake plus opportunity cost i.e contribution margin per stake for outside customer.

The fixed costs will not affect the decision making, hence will not be considered.

Thus the minimum acceptable Transfer price from the view point of seller would be,

Transfer Price to solar light division ($) (3.55 + 0.75) = $ 4.30

Ans: (d) - $4.30 per stake