Sally is compiling some numbers for the factory where she works. This factory has many business units, some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units within the company. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Business Unit A had sales of 75,000 units for a total of $322,500. If an internal department wants to purchase 4,370 units, then what would Business Unit A's additional profit be?
A) $0.00
B) $5,812.10
C) $12,978.90
D) $18,791.00

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for the minimum acceptable transfer price when there is no idle capacity: variable cost per unit + opportunity cost per unit. The minimum acceptable transfer price in this case would be equal to the sales price per unit to external customers = $322,500/75,000 units = $4.30. The internal amount of the sale would be: 4,370 units × $4.30 = $18,791. Since the units are being sold to the internal entity for the same amount as they would be sold to an external party, the sale would result in additional profit of $0.00 (Choice A).

Sally Is Compiling Some Numbers for the Factory Where She