The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: The total fixed costs would be the same for all the alternatives considered below.
-Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.What is the lowest transfer price that would not reduce the profits of the Post Division?
A)$0.90
B)$1.35
C)$1.41
D)$1.75

Question

The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division:  The total fixed costs would be the same for all the alternatives considered below.
-Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.What is the lowest transfer price that would not reduce the profits of the Post Division?
A)$0.90 
B)$1.35 
C)$1.41 
D)$1.75

Quizplus · Accepted Answer

Total contribution margin on lost sales = ($1.75 per unit - $0.90 per unit)F1F1F1S1F1F1F10 15,000 units
= $0.85 per unit F1F1F1S1F1F1F10 15,000 units = $12,750
Opportunity cost = Total contribution margin on lost sales F1F1F1S1F1F1F10 Number of units transferred
= $12,750 F1F1F1S1F1F1F10 25,000 units = $0.51 per unit
Transfer price > Variable cost per unit + Opportunity cost per unit
= $0.90 per unit + $0.51 per unit = $1.41 per unit