X corp makes and sells a single product which is used by manufacturers of fork l
ID: 2434906 • Letter: X
Question
X corp makes and sells a single product which is used by manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at $24 per unit. Annual capacity is 20,000 units and the variable cost to make each unit is $16. Y corp would like to buy 10,000 units a year from X Corp to use in its products. There would be no cost savings from transferring the units within the company rather than selling them on the outside market. What should be the lowest acceptable transfer price from the perspective of X Corp?$21.40, $24, $16, $17.60
Explanation / Answer
As the present sales is 12,000 units, and the Y corporation require 10,000 units. The total capacity is 20,000 units, therefore the outside sale of 2,000 will be lost. The contribution loss on 2,000 will be $16,000 ($24 - $16), which will be required to be recovered from the sale of 10,000 units. The loss is $1.60 per unit. Variable cost = $16.00 Contribution loss = $1.60 Lowest acceptable price = $17.60 Hence the correct answer is $17.60
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