Question

Assume Division A has provided the following information regarding the one product that it manufactures and sells on the outside market: Selling price per unit (o the outside market) Variable cost per unit Fixed costs per unit (based on capacity) Capacity in units S101 $63 $10 30,000 Division A has been offered the opportunity to sell 5,000 units of its only product to Division B within the same company. Division B can either agree to a transfer price with Division A or purchase a comparable product on the outside market for $101. If Division A is currently selling 26,000 units on the outside market and the Division B chooses to buy 5,000 units on the outside market (rather than agreeing to a transfer price with Division A). Required: Compute the following 1. Calculate the lowest acceptable transfer price for the seller (Division A)? 2. Calculate the highest acceptable transfer price for the buyer (Division B)? 3. Calculate the range of acceptable transfer prices between the two divisions? 4. Calculate the excess price paid per unit? 5. Calculate the impact on profits for the company as a whole?

Answer 1

As the division has excess capacity, minimum transfer price will equal variable cost of transfer.
Lowest acceptable transfer price = $65
$65 is correct option