The Post Division of the Chester Company produces basic posts which can be sold

Question

The Post Division of the Chester Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the Chester Company . Last year the Lamp Division bought all of its 25,000 posts from Post Division. The following data are available for last year's activities of the Post Division: Capacity in units 300,000 posts Selling price per cost to outside customers $1.75 Variable costs per post $0.90 Fixed costs, total $130,000 Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. Further suppose that outside supplier is willing to provide the Lamp Division with basic posts for $1.45 . the lamp division thinks this price is too high and wants to buys post from the lamp division. what is the minimum price the post division is willing to charge to the lamp division

Explanation / Answer

Minimum price the post division is willing to charge to the lamp division

for 25000 posts = variable costs incurred + contriution lost for 15000 ouside sales (opportunity cost)

= 0.9*25000 + 15000 * (1.75-0.9)

= 22500 + 12750 = 35250

pe unit = 35250 / 25000 = $1.41

As outside supplier provides posts as $ 1.45 and internal transfer can be done at minimum price of $1.41. It is advantageous to get the internal transfer done instead of purchasing from outside supplier.

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