Dusty Company's records reveal the following: Variable costs:
The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier.Division A has excess capacity.Division B can buy the parts for $75 per unit from an outside supplier.What is the lowest transfer price per unit Division A will accept from Division B?
A)$24
B)$51
C)$66
D)$75

Question

Dusty Company's records reveal the following:   Variable costs:
 The variable costs of Division B will be incurred whether it buys from Division A or from an outside supplier.Division A has excess capacity.Division B can buy the parts for $75 per unit from an outside supplier.What is the lowest transfer price per unit Division A will accept from Division B?
A)$24 
B)$51 
C)$66 
D)$75

Quizplus · Accepted Answer

The lowest transfer price Division A will accept is equal to its variable costs, which are given as $51 per unit. Choosing a transfer price higher than this would result in a loss for Division A. Division B can still benefit from buying from Division A at this transfer price because it is lower than the cost of buying from an outside supplier, which is $75 per unit. Therefore, the optimal decision is for Division B to buy from Division A at a transfer price of $51 per unit.

Dusty Company's Records Reveal the Following: Variable Costs