Question

The Pole Division produces poles which can be sold to outside customers or transferred to the Flag Division. The following data are available for last year's activities in the Pole Division:

Capacity in units                     400,000 poles

Outside demand                      380,000 poles

Demand by Flag Division         25,000 poles

Selling price                               $5.00

Variable cost                              $2.75

Total fixed costs                     $200,000
  

On a transfer to the Flag Division, the Pole Division can save $0.65 of the variable costs per unit transferred.  HINT: Figure out the opportuning cost for the 5,000 units and average over the total units transferred.

		$2.55
		$5.00
		$2.10
		$4.35
		$2.75

Answer 1

Total capacity	400,000
Outside demand	380,000
Excess capacity	20,000
Demand by Flag division	25000
So the remaining demand	5,000
This demand will be fulfilled by cutting external customers
Contribution foregone on 5000 units
Selling revenue 5000*5	$       25,000
Variable cost (5000*2.75)	$     (13,750)
Contribution foregone	$       11,250
Calculation of price being charged
Relevant cost for outside customers	$           2.75
Saving in tranfer to flag division	$           0.65
Relevant cost	$           2.10
Relevant variable cost for 25000 units	25000*2.10
Relevant variable cost for 25000 units	$       52,500
Profits foregone	$       11,250
Total cost for 25000 units	$       63,750
Minimum transfer price	63750/25000
Minimum transfer price	$           2.55