The Kelso Division produces and sells a product to external and internal customers. Per-unit information about its operations include: $\begin{array}{l}
\begin{array}{lr}
\text { Selling price per unit to external customers } & \$ 250 \
\text { Variable manufacturing costs per unit } & 115 \
\text { Fixed manufacturing overhead costs per unit } &70
\end{array}\

\end{array}$
If Kelso is operating at capacity and has unlimited external customer demand, what should be the transfer price for Kelso's product?

Question

The Kelso Division produces and sells a product to external and internal customers. Per-unit information about its operations include: $\begin{array}{l}
\begin{array}{lr}
\text { Selling price per unit to external customers } & \$ 250 \
\text { Variable manufacturing costs per unit } & 115 \
\text { Fixed manufacturing overhead costs per unit } &70
\end{array}\

\end{array}$
  If Kelso is operating at capacity and has unlimited external customer demand, what should be the transfer price for Kelso's product?

Quizplus · Accepted Answer

Since Kelso is operating at capacity and has unlimited external customer demand, the transfer price should be based on the variable cost of the product, which is $160. However, since the internal customer is a part of the same company, the transfer price should also consider the opportunity cost of selling to the external customer instead. The contribution margin per unit when selling to external customers is $250 - $160 = $90. Therefore, the transfer price should be at least equal to the contribution margin, which is $90. Choice B is the closest option to this price.

The Kelso Division Produces and Sells a Product to External