The Pole Division of Hillyard Company produces poles which can be sold to outside customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division bought 50,000 poles from Pole at $2.50 each. The following data are available for last year's activities in the Pole Division: In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000 poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to outside customers (rather than only 350,000 poles as shown above) if it were not making sales to the Flag Division.
-According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$2.50
B)$2.00
C)$2.60
D)$3.00

Question

The Pole Division of Hillyard Company produces poles which can be sold to outside customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division bought 50,000 poles from Pole at $2.50 each. The following data are available for last year's activities in the Pole Division:  In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000 poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to outside customers (rather than only 350,000 poles as shown above) if it were not making sales to the Flag Division.
-According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$2.50 
B)$2.00 
C)$2.60 
D)$3.00

Quizplus · Accepted Answer

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
where Opportunity cost per unit = Total contribution margin on lost sales F1F1F1S1F1F1F10 Number of units transferred
Total contribution margin on lost sales = ($3 per unit - $2 per unit)F1F1F1S1F1F1F10 30,000 units = $30,000
Opportunity cost per unit = Total contribution margin on lost sales F1F1F1S1F1F1F10 Number of units transferred
= $30,000 F1F1F1S1F1F1F10 50,000 units = $0.60 per unit

The Pole Division of Hillyard Company Produces Poles Which Can