(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer: Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$30 per timer
B)$27 per timer
C)$25 per timer
D)$15 per timer

Question

(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer:  Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price.According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$30 per timer 
B)$27 per timer 
C)$25 per timer 
D)$15 per timer

Quizplus · Accepted Answer

Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($30 per timer - $15 per timer)× 5, 000 timers = $75, 000
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)
Transfer price > $15 per timer + ($75, 000 ÷ 5, 000 timers)= $15 per timer + $15 per timer = $30 per timer

(Appendix 12A)Division T of Clocker Company Makes a Timer Which