Question

Division A does not have excess capacity to produce Product XX. The division can sell Product XX for $10 per unit outside the company. Variable costs are $6 per unit. Division B wants to purchase Product XX from Division A to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for $12 per unit. What is the minimum transfer price for Division A

Answer 1

Minimum transfer price = $10

Step-by-step explanation:

The Division A is operating at full capacity, hence it has no excess capacity

This implies that it can not produce enough to meet both the internal demand (from Division B) and external buyers.

Hence, it implies that Division A can not accommodate the demands of the Division B at a price lower than the external price of $10. Any price lower than $10 would result into a loss in contribution.

To maximize and optimize the group profit

Minimum transfer price = External selling price at which Division A can sell product XX

Minimum transfer price = $10