The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company: If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each.
-Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division?
A) $28.00
B) $31.75
C) $41.00
D) $42.00

Question

The Vega Division of Ace Company makes wheels which can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month's operations for the Vega Company:  If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each.
-Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division?
A) $28.00 
B) $31.75 
C) $41.00 
D) $42.00

Quizplus · Accepted Answer

The Vega Division should consider the opportunity cost of selling its wheels to the Walsh Division instead of outside consumers. If it sells 4,000 wheels to Walsh, it would lose 4,000 units of outside sales. Therefore, the incremental cost of selling to Walsh is the difference between $42 (the transfer price) and $41 (the outside supplier price), which is $1.

Additionally, Vega can avoid $2 in sales commission per wheel by selling to Walsh. Thus, Vega would only be willing to accept a transfer price that is lower than the outside supplier price plus the incremental cost, which is $41 + $1 = $42. Hence, the lowest acceptable transfer price from the perspective of the Vega Division would be $41+$1 = $31.75/unit.

Therefore, the best choice is B, $31.75.

The Vega Division of Ace Company Makes Wheels Which Can