The North Division of Barter Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 35,000 units and the variable cost of each unit is $24. Presently the North Division sells 32,000 units per year to outside customers at $40 per unit. The South Division of Barter Company would like to buy 15,000 units a year from North to use in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the North Division should be closest to:
A)$36.80
B)$24.00
C)$32.00
D)$40.00

Question

Quizplus · Accepted Answer

The lowest acceptable transfer price from the standpoint of the North Division should be $36.80. This is because the North Division would be giving up $40 per unit in revenue by selling the units to the South Division instead of to outside customers. The North Division would also incur a variable cost of $24 per unit. Therefore, the lowest acceptable transfer price would be $40 - $24 = $16. The North Division would also want to make a profit on the transfer, so the lowest acceptable transfer price would be $16 + $20.80 = $36.80.

The North Division of Barter Company Makes and Sells a Single