Estes Company has two operating divisions, A andB. The following information is provided for Division A: Division B uses the type of product produced by Division A and has approached Division A about buying the product internally. Division B is currently paying $300 to purchase the product from an outside source. If Division A sells internally it can save $10 per unit in variable costs. Assuming that Division A has sufficient excess capacity to produce all of the units requested by Division B, which of the following is the lowest price Division A should consider for the transfer?
$$\begin{array} { | l | l r | }
\hline \text { Unit selling price } & \$ & 350 \
\hline \text { Unit variable costs } & \$ & 200 \
\hline \text { Unit fixed costs } & \$ & 70 \
\hline
\end{array}$$
A)$300
B)$190
C)$260
D)$250

Question

Estes Company has two operating divisions, A andB. The following information is provided for Division A: Division B uses the type of product produced by Division A and has approached Division A about buying the product internally. Division B is currently paying $300 to purchase the product from an outside source. If Division A sells internally it can save $10 per unit in variable costs. Assuming that Division A has sufficient excess capacity to produce all of the units requested by Division B, which of the following is the lowest price Division A should consider for the transfer?
$$\begin{array} { | l | l r | } 
\hline \text { Unit selling price } & \$ & 350 \
\hline \text { Unit variable costs } & \$ & 200 \
\hline \text { Unit fixed costs } & \$ & 70 \
\hline
\end{array}$$
A)$300
B)$190
C)$260
D)$250

Quizplus · Accepted Answer

Division A should consider a transfer price of $190, which is the variable cost of $200 less the $10 per unit savings in variable costs that Division A can achieve by selling internally.

Estes Company Has Two Operating Divisions, a AndB A)$300 B)$190 C)$260 D)$250

Estes Company Has Two Operating Divisions, a AndB A)$300
B)$190
C)$260
D)$250