Division X makes a part that it sells to customers outside o

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: 105 Selling price to outside customers Variable cost per unit Total fixed costs Capacity in units $ 828,000 34,500 Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $101 per unit and would substitute the part made by Division X. Division Y requires 6,900 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? $80 $96 O $24 $105

Solution

If division X has an excess capacity, then it can transfer that excess amount of units to division Y at transfer price of variable cost per unit. But as in the given case, the capacity of division X is 34,500 units and it can already sell all the units to outside market. Therefore the lowest acceptable transfer price will be equal to variable cost per unit plus contribution lost for each unit transfer to division Y by division X.

Contribution per unit to division X = Selling Price per unit - Variable cost per unit

= $105 - $70 = $35 per unit

Lowest Acceptable transfer price for division X = Variable cost per unit+Contribution lost per unit

= $70 + $35 = $105 per unit

Therefore the lowest acceptable transfer price from the perspective of Division X is $105 per unit. Hence the correct option is D) $105.