Koppenhaver Products, Incorporated has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below: The Electronics Division is currently purchasing 15,000 of these relays per year from an overseas supplier at a cost of $57 per relay. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $57 per unit
B) $41 per unit
C) $53 per unit
D) $63 per unit

Question

Koppenhaver Products, Incorporated has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:  The Electronics Division is currently purchasing 15,000 of these relays per year from an overseas supplier at a cost of $57 per relay. Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $57 per unit 
B) $41 per unit 
C) $53 per unit 
D) $63 per unit

Quizplus · Accepted Answer

The minimum acceptable transfer price for the valves from the standpoint of the Valve Division would be the variable cost per unit plus the opportunity cost per unit. The variable cost per unit is given as $35, and the opportunity cost per unit is the profit that the Valve Division is giving up by not selling the valve to outside customers, which is $13 ($83 selling price - $35 variable cost - $10 avoided variable expenses). Therefore, the minimum acceptable transfer price would be $35 + $13 = $48. Since the overseas supplier is charging $57 per relay, the Valve Division could charge anywhere between $48 and $57 per relay and still be better off than not making the transfer at all. Choice C is the closest to this range.

Koppenhaver Products, Incorporated Has a Relay Division That Manufactures and Sells