Rohrer Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below: The Automotive Division is currently purchasing 10,000 of these motors per year from an overseas supplier at a cost of $88 per motor.
Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. What should be the minimum acceptable transfer price for the motors from the standpoint of the Motor Division?

Question

Rohrer Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor that could be used by another division in the company, the Automotive Division, in one of its products. Data concerning that motor appear below:  The Automotive Division is currently purchasing 10,000 of these motors per year from an overseas supplier at a cost of $88 per motor.
Assume that the Motor Division has enough idle capacity to handle all of the Automotive Division's needs. What should be the minimum acceptable transfer price for the motors from the standpoint of the Motor Division?

Quizplus · Accepted Answer

From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $41 per unit + ($0 ÷ 10,000 units) = $41 per unit + $0 per unit = $41 per unit