1- Division A makes a part with the following characteristics: Production capaci

Question

1- Division A makes a part with the following characteristics:

Production capacity in units 15,000 unit

awlling price to outside customers 25$

variable cost per unit 18$

total fixed cost 60,000$

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each. Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. Variable costs would decrease by $1 on any intra company transfers. What is the minimum transfer price for this transaction?

Explanation / Answer

Minimum transfer price for this transaction is the variable cost and any increase or decrease in variable cost due to transfer to other division :

Hence due to internal transfer there is an Decrease in variable cost to the Division A and the fixed cost is intact due to this tranfer hence Fixed cost is not to be considered in calculation of minimum transfer price ,

so the minimum transfer price is 18-1 i.e.$17 ,

and since there is no loss of revenue to the Division A so opportunity cost is not considered for calculating transfer price .

Transfer Price = $17

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