Question

The Circus division of Krusty The Clown Industries produces pull-off steering wheels that can be sold to outside customers or transferred to the Clown Car Division of the company. The following information has been collected by Krusty’s controller:

Production capacity                             100,000 units

Selling price                                             $60 per unit

Variable production cost                     $36 per unit

Variable selling cost                              $4 per unit

Fixed production cost                          $7 per unit

Number of transformers needed by the Clown Car Division 6,000

If the Circus division transfers its units to the Clown Car division, it can avoid $2 of the variable selling cost.

Required:

1. What is the lowest acceptable per unit transfer price if the Circus division is currently only selling 80,000 units to outside customers?
2. What is the full cost transfer price per unit?
3. What is the range for a negotiated price?
4. If the Circus division is instead operating at capacity before considering the internal transfer, then what would be an acceptable transfer price and why?

Answer 1

Because if circus divison will be earning the contribution , if goods were sold to outside customers. Since the demand of the product in outside market exist and circus division has alternative to sell it to outside customers it cannot forego its contribution on sale. Hence it will be charging the same amount while transferring internally except it can forego the avoidable cost ( i.e. Variable selling cost of $ 2 per unit ) .

Comment below if you have any query i will solve it asap !! thanks