Question

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. Last year, the Lantern Division bought all of its 28,000 pillars from Pillar at $1.35 each. The following data are available for last year's activities of the Pillar Division:

Capacity in units		390,000	pillars
Selling price per pillar to outside customers	$	1.60
Variable costs per pillar	$	0.80
Fixed costs, total	$	225,000

The total fixed costs would be the same for all the alternatives considered below.

Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 14,000 units. What is the lowest transfer price that would not reduce the profits of the Pillar Division?

PLEASE SHOW ALL WORK.

Answer 1

Minimum transfer price to other division is sum total of variable cost of production, additional fixed cost (if any) and loss of contribution on regular sales (If regular sales is cut to fulfil interdivision demand)

In the above case, Minimum transfer price will be variable cost of 28000 units and contribution lost on sale of 14000 units.

Minimum transfer price calculation
Variable cost of 28000 Pillars (28000 x $0.80)	$ 22,400.00
Loss of Contribution on 14000 pillars (14000 x $0.80)	$ 11,200.00
Total cost to be recovered	$ 33,600.00
Units to be sold	28,000
Minimum transfer price	$            1.20

Contribution margin = sales price– Variable cost per unit