Question

A corporation has two divisions, the Parts Division and the Appliance Division. The Appliance Division currently buys its switches from an outside supplier for $25 each. It needs 4,000 switches a year. The Parts Division makes switches, and has recorded the following information:

Parts Division – Outside sale of switches: Price $27
Direct materials $10
Direct labor $ 2

Variable overhead $ 4 Fixed overhead $ 4

The Appliance Division wants to buy the 4,000 switches from the Parts Division. The two will negotiate a transfer price. The Parts Division has made it clear that they only have 3,000 units of excess capacity. However, the Appliance Division has pointed out that the Parts Division will avoid $1 per unit in variable costs if the transfer occurs. What is the logical average lowest transfer price that the Parts Division would accept (assuming the Parts Division did not want to lower their divisional net income and all 4,000 units are transferred)?

$26
$16.75
$17.75
None of these are correct

$15

Answer 1

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