Question

Sandpiper Inc. has a division that manufactures a component that sells for $ 160$160 and has a variable cost of $ 30$30. Another division of the company wants to purchase the component. Fixed cost per unit of the component is $ 20$20. What is the minimum transfer price if the division is operating at​ capacity?

Answer 1

If the division is operating at full capacity and selling all the units that it produces, then it must treat the other division as a normal customer, so the selling price should be the same ($160 per unit). The company is currently making $110 in profits per unit sold (= $160 - $30 - $20 = $110).

If the division sold their products at a lower price, they would be losing money, and no division wants to lose money in order to benefit another division and make them earn higher profits.

If the division was operating below full capacity, then it could sell their products at a lower value.