Figure 3
The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows:
a Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each.
-Refer to Figure 3. The minimum transfer price that the Adam Division would accept is

Question

Figure 3
The Adam Division produces a component that is used by the West Division. The cost of manufacturing the component is as follows:
 a Based on a practical volume of 250,000 components
Other costs incurred by the Adam Division are as follows:
  The component usually sells for £90 in the external market. The Adam Division is capable of producing 250,000 components per year; however, only 200,000 components are expected to be sold next year. The variable selling expenses are avoidable if the component is sold internally.
The West Division has been buying the same component from an external supplier for £80 each. The West Division expects to use 40,000 units of the component next year. The manager of the West Division has offered to buy 40,000 units from the Adam Division for £56 each.
-Refer to Figure 3. The minimum transfer price that the Adam Division would accept is

Quizplus · Accepted Answer

The minimum transfer price that the Adam Division would accept is the variable cost per component plus any opportunity cost foregone by selling the component internally. Variable cost per component = ^a = £30 Opportunity cost per component = External market price - variable selling expenses = £90 - £0 = £90 Therefore, the minimum transfer price would be: Minimum transfer price = Variable cost per component + Opportunity cost per component = £30 + £90 = £120 Since the West Division is only willing to pay £56 per component, the Adam Division would not be willing to make the internal transfer. Therefore, the best choice is not to make the internal transfer at all. The Adam Division should continue to sell the components externally, as this would result in a higher profit margin than selling them internally.

Figure 3 the Adam Division Produces a Component That Is Used by Used