Division Delta of Golvin Corporation makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 9,000 units per year to outside customers at $57 per unit. The annual capacity is 10,000 units and the variable cost to make each unit is $32. Division Echo of Golvin Corporation would like to buy 2,000 units a year from Division Delta to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of Division Delta?
A) $57.00 per unit
B) $19.50 per unit
C) $44.50 per unit
D) $32.00 per unit

Question

Quizplus · Accepted Answer

The highest price at which Division Echo would value the units is its incremental revenue of using the units in its own production, which is $57 per unit. However, Division Delta would not want to sell the units at this price since it would lose the profit it earns from selling the units to outside customers.

The variable cost per unit is $32, so any price above this amount would generate a positive contribution margin for Division Delta. However, since there are no cost savings from transferring the units within the company rather than selling them on the outside market, Division Delta should set the transfer price at the highest cost it incurs to produce the units, which is the variable cost of $32 per unit.

Therefore, the lowest acceptable transfer price from the perspective of Division Delta is the variable cost per unit, which is $32. Option C is the only answer that falls within this range.

Division Delta of Golvin Corporation Makes and Sells a Single