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 (on the outside market) $ 100 Variable cost per unit $ 65 Fixed costs per unit (based on capacity) $ 10 Capacity in units 30,000 Division A has been offered the opportunity to sell 5,000 units of its only product to another division within the same company. The other division can either agree to a transfer price with Division A or purchase a comparable product on the outside market for $100. If Division A is currently selling 28,000 units on the outside market, what is the range of acceptable transfer prices between the two divisions

Answer 1

The range of acceptable transfer prices between the two divisions is:

= $83.20 to $100.

Step-by-step explanation:

a) Data and Calculations:

Selling price per unit (on the outside market) $ 100

Variable cost per unit $ 65

Fixed costs per unit (based on capacity) $ 10

Production capacity in units 30,000

Current sales capacity = 28,000

Units required by another division = 5,000

New sales capacity = 33,000 (28,000 + 5,000)

Total fixed costs per current capacity = $300,000 ($10 * 30,000)

Total production costs = $2,250,000 ($65 * 30,000 + $300,000)

Product cost per unit with old capacity = $75 ($2,,250,000/30,000)

Additional production capacity required for the internal order = 3,000 (33,000 - 30,000)

New total fixed costs for required capacity = $600,000 ($300,000 * 2)

Total production costs = $2,745,000 ($65 * 33,000 + $600,000)

Product cost per unit with new capacity = $83.20 ($2,745,000/33,000)