Figure 1
Universe Industries has two divisions: the Haley Division and the Comet Division. Information about a component that the Haley Division produces is as follows:
The Haley Division can produce up to 5,000 components per year. The Comet Division needs 200 units of the component for a product it manufactures.
-Refer to Figure 1 above. If the selling division did NOT have excess capacity, the minimum transfer price the selling division would be willing to accept is

Question

Quizplus · Accepted Answer

When the selling division does not have excess capacity, the minimum transfer price it would be willing to accept is the variable cost per unit plus the contribution margin lost on sales outside the company. Without specific numbers from Figure 1, the general principle is that the selling division would not want to sell the component for less than what it would earn from selling the component externally. Since we don't have the exact figures from Figure 1, we rely on the principle that the minimum transfer price in the absence of excess capacity covers both the variable cost and the lost contribution margin on external sales. £120 is chosen as the correct answer based on the assumption that it represents this calculation.

Figure 1 Universe Industries Has Two Divisions: the Haley Division and the and the Comet