(Appendix 12A)The North Division of Barter Company makes and sells a single product, which is a part used in manufacturing trucks.The annual production capacity is 35, 000 units and the variable cost of each unit is $24.Presently the North Division sells 32, 000 units per year to outside customers at $40 per unit.The South Division of Barter Company would like to buy 15, 000 units a year from North to use in its production.There would be no savings in variable costs from transferring the units internally rather than selling them externally.The lowest acceptable transfer price from the standpoint of the North Division should be closest to:
A)$36.80
B)$24.00
C)$32.00
D)$40.00

Question

Quizplus · Accepted Answer

Available capacity for outside sales = Capacity - Internal sales
= 35, 000 units - 15, 000 units = 20, 000 units
Lost outside sales = Total outside demand - Available capacity for outside sales
= 32, 000 units - 20, 000 units = 12, 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 = 12, 000 units × ($40 per unit - $24 per unit)= $192, 000
Transfer price > $24 per unit + ($192, 000 ÷ 15, 000 units)= $24.00 per unit + $12.80 per unit = $36.80 per unit

(Appendix 12A)The North Division of Barter Company Makes and Sells