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) $34.50 per unit
D) $32.00 per unit

Question

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 10,000 units - 2,000 units = 8,000 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 9,000 units - 8,000 units = 1,000 units
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 + Opportunity cost per unit
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Total contribution margin on lost sales = 1,000 units × ($57 per unit - $32 per unit) = $25,000
Transfer price > $32 per unit + ($25,000 ÷ 2,000 units) = $32 per unit + $12.50 per unit = $34.50 per unit

Division Delta of Golvin Corporation Makes and Sells a Single