The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company.Last year,the Solar Light Division bought 50,000 stakes from the Stake Division at $2.50 each.The following data are available for last year's activities in the Stake Division:
In order to sell 50,000 stakes to the Solar Light Division,the Stake Division must give up sales of 30,000 stakes to outside customers.That is,the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above)if it were not making sales to the Solar Light Division.According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?

Question

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company.Last year,the Solar Light Division bought 50,000 stakes from the Stake Division at $2.50 each.The following data are available for last year's activities in the Stake Division:
 In order to sell 50,000 stakes to the Solar Light Division,the Stake Division must give up sales of 30,000 stakes to outside customers.That is,the Stake Division could sell 380,000 stakes each year to outside customers (rather than only 350,000 stakes as shown above)if it were not making sales to the Solar Light Division.According to the formula in the text,what is the lowest acceptable transfer price from the viewpoint of the selling division?

Quizplus · Accepted Answer

The formula for the lowest acceptable transfer price is:
Variable cost per unit + (contribution margin per unit x amount of sales given up)
Variable cost per unit = $1.50 (given)
Contribution margin per unit = selling price per unit - variable cost per unit
= $2.60 - $1.50
= $1.10
Amount of sales given up = 30,000
Therefore, the lowest acceptable transfer price is:
$1.50 + ($1.10 x 30,000/50,000) = $2.60
Option C is the only choice that meets this criteria.

The Stake Division of the Outdoor Lumination Company Produces Stakes