The National Division of Roboto Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be
A) $45.00
B) $30.00
C) $22.50
D) $37.50

Question

The National Division of Roboto Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. Roboto's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure:  If the National Division buys its 10,000 widgets from the Overseas Division, the transfer price should be
A) $45.00 
B) $30.00 
C) $22.50 
D) $37.50

Quizplus · Accepted Answer

The transfer price should be set at the variable cost per unit, which is $15 per unit ($8 direct materials + $7 variable overhead). Therefore, the transfer price should be $15 x 10,000 units = $150,000 for the National Division. If the transfer price was set at $30 (the outside supplier's price), the Overseas Division would not make any profit, and if it was set at $45 or $37.50, the National Division would be overpaying compared to the variable cost per unit. Therefore, the best choice is C) $22.50.

The National Division of Roboto Ltd Is Buying 10,000 Widgets