The Southern Division of Barstol Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 12,000 units and the variable cost of each unit is $35. Presently the Southern Division sells 11,000 units per year to outside customers at $49 per unit. The Northern Division of Barstol Company would like to buy 4,000 units a year from Southern to use in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the Southern Division should be closest to:
A) $45.50 per unit
B) $35.00 per unit
C) $32.00 per unit
D) $49.00 per unit

Question

Quizplus · Accepted Answer

The Southern Division should set a transfer price that is at least equal to the external selling price of $49 per unit. However, since there would be no savings in variable costs from transferring internally, the transfer price should not exceed the variable cost per unit of $35. 
Therefore, the transfer price should be between $35 and $49 per unit. 
To determine the lowest acceptable transfer price, the Southern Division should consider the opportunity cost of selling 4,000 units externally versus internally. 
If the Southern Division sells the 4,000 units externally, it would have 7,000 units left to sell at the external selling price of $49 per unit, which would generate a total revenue of $343,000. 
If the Southern Division transfers the 4,000 units to the Northern Division at a transfer price of $45.50 per unit, it would generate a total revenue of $182,000 ($45.50 x 4,000) from the internal transfer and still have 7,000 units left to sell externally at $49 per unit, which would generate a total revenue of $343,000. 
Therefore, the Southern Division could generate the same total revenue of $343,000 by selling 4,000 units internally at a transfer price of $45.50 per unit or externally at $49 per unit. 
Since $45.50 is the lowest acceptable transfer price that would generate the same total revenue, it is the best choice from the standpoint of the Southern Division.

The Southern Division of Barstol Company Makes and Sells a Single