Question

Yasmin Company has a Components Division which produces parts for product divisions within the company as well as for outside manufacturers. The company's Business Products Division has asked the Components Division to provide it with a new part, A40. Production data related to A40 are as follows:

Units needed by Business Products Division	20,000 units
Variable production cost	$21 per unit
Allocated fixed production cost	$3.50 per unit

Unfortunately, producing the new part requires the same production team within the Components Division that manufactures another part, B19, for outside customers. Data related to the production and sale of B19 to outside customers are below:

Units currently produced & sold	100,000 units
Selling price	$70.00 per unit
Variable production cost	$52.00 per unit
Variable selling cost	$8.00 per unit
Allocated fixed production cost	$2.00 per unit

  

Q. If the Components Division must reduce the production of B19 by 22% in order to produce all of the part A40 requested by the Business Products Division, what would be the minimum transfer price they should be willing to accept assuming there would be no impact to their fixed cost?

Answer 1

Answer:

Contribution per unit   =    Selling Price (-) Total variable cost                                                =      $ 70 per unit (-) [ $ 52 + $ 8] per unit                                                =      $ 70 (-) $ 60                                                =   $ 10 per unit

Total Contribution by reduction in Production                              =    100,000 Units x 22% x $ 10                              =     $ 220,000

Opportunity cost    = Total Contribution / Units Needed                                       =   $ 220,000 / 20,000 units                                       =     $ 11 per Unit

Minimum Transfer price   =   Variable Production cost per unit + opportunity cost                                                      =       $ 21 per unit   + $ 11 per unit                                                      =        $ 32 per Unit

Minimum transfer price they should be willing to accept assuming there would be no impact to their fixed cost    = $ 32 per Unit