Division AA does not have excess capacity to produce Product XX.The division can sell Product XX for $10 per unit outside the company.Variable costs are $6 per unit.Division BB wants to purchase Product XX from Division AA to use in Product ZZ.The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit.An outside supplier will sell Product XX for $12 per unit.What is the minimum transfer price for Division AA?
A) $4 per unit
B) $6 per unit
C) $10 per unit
D) $12 per unit

Question

Quizplus · Accepted Answer

The minimum transfer price for Division AA should be equal to what they can sell the product outside the company, which is $10 per unit. Selling the product to Division BB for less than $10 would decrease the profitability of Division AA, and selling it for more than $10 would not be beneficial for Division BB as they can buy it from an outside supplier for $12 per unit. Therefore, the minimum transfer price for Division AA should be $10 per unit.

Division AA Does Not Have Excess Capacity to Produce Product