Question

The Southern Division of Barstol Company makes and sells a single product, which is a part used in manufacturing trucks. The annual production capacity is 29,000 units and the variable cost of each unit is $24. Presently the Southern Division sells 26,000 units per year to outside customers at $35 per unit. The Northern Division of Barstol Company would like to buy 15,000 units a year from Southern to use in its production. There would be no savings in variable costs from transferring the units internally rather than selling them externally. The lowest acceptable transfer price from the standpoint of the Southern Division should be closest to

Answer 1

• All working forms part of the answer
• Step 1: Calculate normal contribution margin per unit on outside customer

A	Normal Selling price to outside customer	$                   35.00
B	Variable Cost	$                   24.00
C = A - B	Contribution margin per unit from outside customer	$                   11.00

• Step 2: Calculate the unit sale lost if units are transferred instead of being sold to outside market.

A	Normal units that can be produced	29,000
B	Units to be transferred	15,000
C = A - B	Remaining units for outside customers	14,000
D	Normal Sale to outside customers	26,000
E = D - C	Sales lost due to special order	12,000

• Step 3: ANSWER

A	Variable cost of Production [15000 units x $ 24]	$         360,000.00
B	Contribution margin lost on outside customer sale [12000 units x $11]	$         132,000.00
C = A+B	Total Relevant Cost for Transfer price	$         492,000.00
D	No. of units to be transferred	15,000
E = C/D	Lowest Acceptable transfer price	$                   32.80

• Answer: Minimum Transfer Price will be closest to $ 32.80 per unit