Question

The following information applies to the questions displayed below.] In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits

Case
A B
Division X:
Capacity in units 101,000 91,000
Number of units being sold to outside customers 101,000 71,000
Selling price per unit to outside customers 54 26
Variable costs per unit 26 12
Fixed costs per unit (based on capacity) 10 4
Division Y:
Number of units needed for production 20,000 20,000
Purchase price per unit now being paid to 45 $24
an outside supplier
Refer to data in case B above . In this case there will be no saving in variable selling cost on intra company sales .
What is the lowest acceptable transfer price from the perspective of selling division?

Answer 1

The lowest acceptable transfer price for Division X in Case B is the variable cost of $12 per unit, provided that selling to Division Y does not limit external sales. If external sales are affected, the opportunity cost must be included, making the lowest transfer price $26.

Step-by-step explanation:

The lowest acceptable transfer price from the perspective of Division X in Case B, considering that there are no savings in variable selling costs on intra-company sales, would be the variable cost per unit plus any opportunity cost incurred by selling internally rather than externally. In this case, the variable cost per unit for Division X is $12. Since Division X is not at full capacity and is selling 71,000 units to outside customers (out of 91,000 capacity), it can produce the additional 20,000 units for Division Y without incurring additional fixed costs, which means the transfer price must cover just the variable cost of $12 per unit. However, if producing for Division Y would mean selling fewer units to the external market, then the opportunity cost would be the contribution margin on lost external sales (external price minus variable cost), which would have to be added to the transfer price. The selling price to outside customers is $26, so if selling internally affects external sales, the opportunity cost is $14 ($26 - $12) per unit, making the lowest transfer price $26.

Answer 2

$12

Step-by-step explanation:

Calculation to determine the lowest acceptable transfer price from the perspective of selling division

Using this formula

Lowest Transfer Price = Variable Costs per unit - Internal Savings + Opportunity Cost

Where,

Variable Costs per unit = $12

Internal Savings = $0

Opportunity Cost = $0

Let plug in the formula

Lowest Transfer Price = $12-$0+$0

Lowest Transfer Price = $12

Therefore the lowest acceptable transfer price from the perspective of selling division is $12