The Battery Division of Barker Company makes a standard 12- volt battery. Produc

Question

The Battery Division of Barker Company makes a standard 12-
volt battery.
Production capacity (number of batteries)...... 300,000
Selling price per battery to outsiders ............. $40
Variable costs per battery ............................. $18
Fixed costs per battery (based on capacity) ... $7
Barker Company has a Vehicle Division that could use this battery in its
forklift trucks. The Vehicle Division would like to buy 50,000 batteries per
year. It is presently buying these batteries from an outside supplier for $39
per battery. should the transfer take place??

Explanation / Answer

Suppose the Battery Division is operating at capacity.

Transfer price>= $18 + ($40-$18)×50,000/50000 = $18 + ($40 - $18)

                      = $40

But the buying division will not pay more than $39, the cost from

buying the batteries from the outside. So the two managers will not be

able to agree to a transfer price and no transfer will voluntarily take place.

Transfer price Cost of buying from outside supplier = $39

no transfer should takeplace since the company gives up $40 in revenues, but saves only $39 in costs.

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