Delemos Products, Incorporated has a Transmitter Division that manufactures and sells a number of products, including a standard transmitter. Data concerning that transmitter appear below: The Remote Devices Division of Delemos Products, Incorporated needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units per year to 76,400 units per year. From the standpoint of the Transmitter Division, what is the minimal acceptable transfer price for the special transmitters for the Remote Devices Division?
A) $90.00 per unit
B) $98.00 per unit
C) $104.00 per unit
D) $107.80 per unit

Question

Delemos Products, Incorporated has a Transmitter Division that manufactures and sells a number of products, including a standard transmitter. Data concerning that transmitter appear below:  The Remote Devices Division of Delemos Products, Incorporated needs 6,000 special heavy-duty transmitters per year. The Transmitter Division's variable cost to manufacture and ship this special transmitter would be $66 per unit. Because these special transmitters require more manufacturing resources than the standard transmitter, the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers from 83,000 units per year to 76,400 units per year. From the standpoint of the Transmitter Division, what is the minimal acceptable transfer price for the special transmitters for the Remote Devices Division?
A) $90.00 per unit 
B) $98.00 per unit 
C) $104.00 per unit 
D) $107.80 per unit

Quizplus · Accepted Answer

To determine the minimal acceptable transfer price for the special transmitters for the Remote Devices Division, we need to consider the opportunity cost of producing these units. Since the Transmitter Division would have to reduce its production and sales of standard transmitters to outside customers, the revenue lost from selling 6,600 (83,000 – 76,400) standard transmitters must also be considered.

First, we calculate the revenue lost from selling 6,600 standard transmitters:
$600 × 6,600 = $3,960,000

Next, we calculate the total variable cost of producing and shipping 6,000 special transmitters:
$66 × 6,000 = $396,000

Adding the opportunity cost to the total variable cost, we get the minimal acceptable transfer price:
($3,960,000 + $396,000) ÷ 6,000 = $726 per unit
However, this price is too high since it includes a markup for profit. To determine the transfer price without any additional markup, we divide the cost by the number of units produced:
$396,000 ÷ 6,000 = $66 per unit
Therefore, the minimal acceptable transfer price for the special transmitters is the variable cost of $66 per unit.

However, the answer options do not include this exact number. The closest option is D, $107.80 per unit, which represents the variable cost plus a markup of 63.3% ($66 x 1.633 = $107.80). While this price includes a markup, it is still within the range of reasonability since it is less than the revenue lost from not selling standard transmitters. Therefore, the best choice is D.

Delemos Products, Incorporated Has a Transmitter Division That Manufactures and Sells