Ebbs Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below: The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 86,000 units per year to 72,500 units per year.
From the standpoint of the Motor Division, what is the minimal acceptable transfer price for the special motors for the Automotive Division?

Question

Ebbs Products, Inc., has a Motor Division that manufactures and sells a number of products, including a standard motor. Data concerning that motor appear below:  The Automotive Division of Ebbs Products, Inc needs 9,000 special heavy-duty motors per year. The Motor Division's variable cost to manufacture and ship this special motor would be $46 per unit. Because these special motors require more manufacturing resources than the standard motor, the Motor Division would have to reduce its production and sales of standard motors to outside customers from 86,000 units per year to 72,500 units per year.
From the standpoint of the Motor Division, what is the minimal acceptable transfer price for the special motors for the Automotive Division?

Quizplus · Accepted Answer

To produce the 9,000 special motors, the Motor Division will have to give up sales of 13,500 of the regular motors to outside customers.
 11eacbfc_c7db_0ccc_8ffe_097dac558bac_TB7552_00 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 + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $46.00 per unit + ($513,000 ÷ 9,000 units) = $46.00 per unit + $57.00 per unit = $103.00 per unit