Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:

Division 1:

Division 2:

If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.

-What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?
A)$33 per unit
B)$35 per unit
C)$47 per unit
D)$50 per unit

Question

Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:

Division 1:

Division 2:

If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.

-What is the maximum price per wheel that Division 2 should be willing to pay Division 1 if a transfer were to take place?
A)$33 per unit 
B)$35 per unit 
C)$47 per unit 
D)$50 per unit

Quizplus · Accepted Answer

The maximum price per wheel that Division 2 should be willing to pay is that which makes the transfer cost the same as the cost of producing the wheels internally, as per the make-or-buy principle. The variable cost of producing the wheel is $40, and there is an opportunity cost of $2 since Division 2 could have used the capacity to produce regular wheels. Therefore, the total cost of producing the specialized wheel internally is $42 per unit. Since Division 1 is willing to sell at $47 per unit, which is above the total cost of Division 2, it is advisable to accept the offer and purchase the specialized wheels from Division 1 at that price. Any price higher than $47 per unit would lead to higher costs compared to manufacturing the wheels internally, while any price lower than $47 would result in a cost savings. Choices A, B, and D are thus eliminated.

Division 1 of Ace Company Makes and Sells Wheels That