39. Division 1 of Ace Company makes and sells wheels that can either be sold to

Question

39. Division 1 of Ace Company makes and sells wheels that can either be sold to outside customers or transferred to Division 2. The following data are available from last month:

Division 2:

If Division 1 sells the wheels to Division 2, Division 1 can avoid $2 per unit in sales commissions.

Suppose that Division 1 sells 11,500 units each month to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

A. $47.00 per unit

B. $43.50 per unit

C. $37.50 per unit

D. $34.73 per unit

Selling price to outside customers $ 50 per unit Variable cost when sold to outside customers $ 35 per unit Capacity 15,000 units

Explanation / Answer

According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

variable cost per unit from division 1 to division 2 = (35-2) = 33

Capacity of division 1 = 15000 unit

sale for outside supplied = 11500

Spare capacity = (15000-11500)=3500 unit

tranfer amount for 3500 unit =3500*33=115500

Transfer amount for 1500 unit : Variable cost+contribution to be lost

= 33+(50-35)

Transfer amount for 1500 unit = 48 per unit

Transfer price = (3500*33+1500*48)/5000 = 37.50 per unit

so answer is c) $37.50 per unit

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