Division E of Harveq Company has the capacity for making 6,000 motors per month and regularly sells 5,400 motors each month to outside customers at a contribution margin of $54 per motor. The variable cost per motor is $41. Division F of Harveq Company would like to obtain 900 motors each month from Division E. What should be the lowest acceptable transfer price from the perspective of Division E?
A) $59.00 per unit
B) $54.00 per unit
C) $41.00 per unit
D) $18.00 per unit

Question

Quizplus · Accepted Answer

To find the lowest acceptable transfer price, Division E should consider the contribution margin it would lose on the 900 motors that could be sold to outside customers.

Contribution margin per motor = Selling price - Variable cost = $54 - $41 = $13

The contribution margin lost due to the transfer to Division F would be: 
Contribution margin lost = 900 x $13 = $11,700

Therefore, the lowest acceptable transfer price should be the variable cost per motor plus the contribution margin lost per motor: 
Lowest acceptable transfer price = Variable cost + Contribution margin lost 
Lowest acceptable transfer price = $41 + $13 = $54

Therefore, the correct answer is A) $59.00 per unit. This is because Division E should add a markup to the lowest acceptable transfer price to obtain a profit margin on the motors sold to Division F. A markup of $5 per motor would result in a transfer price of $59 per motor, which would provide Division E with a profit margin of $5 per motor.

Division E of Harveq Company Has the Capacity for Making