Question

The Southern Division of Barstol Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 39,000 units and the variable cost of each unit is $50. Presently the Southern Division sells 34,000 units per year to outside customers at $60 per unit. The Northern Division of Barstol Company would like to buy 20,000 units a year from Southern to use in its production. There would be no savings in variable costs from transferring the units Internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the Southern Division should be closest to: Multiple Choice 0 $57.50 per unit 0 $50.00 per unit 0 $60.00 per unit 0 $17.50 per unit

Answer 1

Solution: Q1 Annual capacity Less : outside sales capacity available 39000 -34000 5000 Annual capacity Internal tranfer outside sales loss in outside sales=34000-19000 39000 -20000 19000 15000 Total variable cost=20000*50 Contribution margin lost on outside sale=15000*(60-50) Total cost / units to be transferred internally lowest acceptable price per unit 1000000 150000 1150000 20000 57.50 Q2 Since the Divicion C has enough excess capacity to manufactured the units for Division D, the additional cost will be the variable cost per unit i.e $34