Division A produces a component for Hielkema Company's main product

Question

Division A produces a component for Hielkema Company's main product - automobiles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: $\begin{array}{lc}
\text { Direct material } & \$ 30 \text { per unit } \
\text { Direct labour } & \$ 25 \text { per unit } \
\text { Variable overhead } & \$ 10 \text { per unit } \
\text { Fixed overhead (based on a capacity of } 5,000 \text { units) } & \$ 6 \text { per unit }
\end{array}$ The minimum price at which A would sell components internally is:

Quizplus · Accepted Answer

The minimum price at which Division A would sell components internally is calculated by adding the variable costs: Direct material ($30) + Direct labor ($25) + Variable overhead ($10) = $65 per unit. Fixed overhead is not considered in the minimum price calculation for internal transfers because it is a sunk cost that will be incurred regardless of the internal transaction.