Lumpkins Products, Incorporated, has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below: The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $59 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that none of the variable expenses can be avoided on transfers within the company. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $50 per unit
B) $38 per unit
C) $62 per unit
D) $59 per unit

Question

Lumpkins Products, Incorporated, has a Valve Division that manufactures and sells a number of products, including a standard valve that could be used by another division in the company, the Pump Division, in one of its products. Data concerning that valve appear below:  The Pump Division is currently purchasing 9,000 of these valves per year from an overseas supplier at a cost of $59 per valve.Assume that the Valve Division is selling all of the valves it can produce to outside customers. Also assume that none of the variable expenses can be avoided on transfers within the company. What should be the minimum acceptable transfer price for the valves from the standpoint of the Valve Division?
A) $50 per unit 
B) $38 per unit 
C) $62 per unit 
D) $59 per unit

Quizplus · Accepted Answer

The minimum acceptable transfer price for the Valve Division should cover both the variable cost per unit and the opportunity cost of lost revenue from selling to outside customers. 
Variable cost per unit = $19 + ($80,000/12,000) = $25.67
Opportunity cost per unit = the selling price to outside customers = $100
Therefore, the minimum acceptable transfer price would be = variable cost per unit + opportunity cost per unit = $25.67 + $100 = $125.67/2 = $62.84, which is rounded down to $62. Therefore, the best choice is C, $62 per unit.

Lumpkins Products, Incorporated, Has a Valve Division That Manufactures and Sells