Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below: Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X can already sell all of the units it can produce on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?
A)$75
B)$66
C)$16
D)$50
E)$25

Question

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:  Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X can already sell all of the units it can produce on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?
A)$75 
B)$66 
C)$16 
D)$50 
E)$25

Quizplus · Accepted Answer

Because there is no opportunity cost, the selling division should not accept any transfer price less than its variable cost of $75 per unit.

Division X Makes a Part That It Sells to Customers