Barrister Company has two divisions: A and Z. The A Division produces a single p

Question

Barrister Company has two divisions: A and Z. The A Division produces a single product that can be sold to outside customers or to the Z Division. Sales forecasts, production statistics and costs for both divisions for 2014 are shown below: A Division: Outside customer demand Z Division demand Market price per unit Variable manufacturing cost per unit Variable selling costs per unit Fixed manufacturing costs Annual capacity 50 000 units 35 000 units $10 $6 $1 $120 000 80 000 units Z Division: Customer demanod Market price per unit Variable manufacturing cost per unit (not including any transfer from A) Variable selling costs per unit Fixed manufacturing costs Annual capacity 35 000 units $50 $20 S5 $350 000 35 000 units When A Division sells to Z Division, no variable selling costs are incurred by A Division. Calculate the minimum per unit transfer price that A Division should charge Z Division in 2014, using the general transfer-pricing formula. A. $6.00 B. $8.50 C. $7.26 D. None of the given answers

Explanation / Answer

Mimimum transfer price = Variable cost per unit plus opportunity cost per unit of the selling division

The opportunity cost refers to the lost contribution margin if the selling division has no excess capacity. If there is excess capacity, there would be no opportunity costs. Fixed costs are ignored because the same amount will be incurred regardless of the number of units produced.

Here, there is short in capacity of 5000 units

Contribution per unit 10 - 6 -1 =$3

Opportunity cost lost = short in capacity x Contribution per unit

= 5000x $3=$15000

Minimum transfer price per unit =(35000*6+15000)/35000

=$6.43 Per unit

Answer D is correct

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