Question

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers	$76
Variable cost per unit	$52
Total fixed costs	$401,000
Capacity in units	$26,000

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division A. Division B requires 5,100 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?

Answer 1

Lowest acceptable transfer price for Division A = $ 76

Analysis: As division A can sell all of the units it can produce to outsiders hence Division A doesn't have any ample capacity to produce extra 5,100 units for division B. Therefore, the selling price to outsider would be the lowest acceptable price for Division A.