The machining division of ITA International has a capacity of 2,230 units. Its s

Question

The machining division of ITA International has a capacity of 2,230 units. Its sales and cost data are:

The machining division is currently selling 2,040 units to outside customers, and the assembly division of ITA International wants to purchase 380 units from machining. If the transaction takes place, the variable selling costs per unit on the units transferred to assembly will be $0/unit, and not $3/unit. What should be the transfer price in order not to affect the machining division’s current profit? (Round answer to 2 decimal places e.g. 5.25.)

Selling price per unit $ 80 Variable manufacturing costs per unit 20 Variable selling costs per unit 3 Total fixed manufacturing overhead 222,700

Explanation / Answer

Variable cost for out side sale = 20+3 =$ 23

Sale price = $ 80

Internal transfer units= 380

Internal transfer variable cost = $ 20

we have to replace 190 units from outside sale

Oppertunity cost for internal transfer = (sale price-variable cost)*190 units

(80-23)*190=$ 10830

Oppertunity cost per unit for internal transfer = $ 10830/380 = $ 28.5

Transfer price price = internal transfer variable cost + oppertunity cost = 20+28.5 = $ 48.5

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