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Transfer Price

Division A makes a part with the following characteristics:

Production capacity in units 15,000 units
Selling price to outside customers 30
Variable cost per unit 20
Fixed cost per unit 4
Total fixed costs 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 28 each.
Reference: 12-18

Suppose that 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. If Division A refuses to accept the 28 price internally, the company as a whole will be:

worse off by 30,000 each period.
better off by 10,000 each period.
worse off by 20,000 each period.
worse off by 40,000 each period.

Solution Preview

The purchase price is $28.

Against this we have to see the ...

Solution Summary

The solution explains the effect on the company of a transfer price.