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 32,000 units and the variable cost of each unit is $37. Presently the Southern Division sells 27,000 units per year to outside customers at $49 per unit. The Northern Division of Barstol Company would like to buy 16,000 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

• a. $20.25 per unit

• b. $45.25 per unit

• c. $37.00 per unit

• d. $49.00 per unit

Answer 1

Correct answer-----------(b) $4.25

Working

	Units	Per unit	Total
Loss of contribution	11000	$                   12.00	$ 132,000.00
Variable cost	16000	$                   37.00	$ 592,000.00
Total relevant cost			$ 724,000.00
Divided by Units			16000
Acceptable price per unit			$             45.25

.

Sales price to outside customer	$        49.00
Relevant Manufacturing cost per unit	$        37.00
Loss on contribution margin per unit on 11000 units	$        12.00

.

Demand of units internally	16000
Capacity unused	5000
Regular sales to be forgone to fulfill internal demand	11000

.

Capacity of the company	32000
Current production and sales	27000
Capacity unused	5000