Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning that antennae appear below: The Aircraft Products Division is currently purchasing 5,000 of these antennaes per year from an overseas supplier at a cost of $57 per antennae.
Assume that the Antennae Division is selling all of the antennaes it can produce to outside customers. What should be the minimum acceptable transfer price for the antennaes from the standpoint of the Antennae Division?

Question

Stokan Products, Inc., has a Antennae Division that manufactures and sells a number of products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning that antennae appear below:  The Aircraft Products Division is currently purchasing 5,000 of these antennaes per year from an overseas supplier at a cost of $57 per antennae.
Assume that the Antennae Division is selling all of the antennaes it can produce to outside customers. What should be the minimum acceptable transfer price for the antennaes from the standpoint of the Antennae Division?

Quizplus · Accepted Answer

The total contribution margin on lost sales is computed as follows:
 11eacbfc_c7d1_6fa8_8ffe_c573c6582d2a_TB7552_00 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 > $22 per unit + ($205,000 ÷ 5,000 units) = $22 per unit + $41 per unit = $63 per unit