Wetherald Products, Inc., has a Pump Division that manufactures and sells a numb

Question

Wetherald Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump that could be used by another division in the company, the Pool Products Division, in one of its products. Data concerning that pump appear below:

The Pool Products Division is currently purchasing 5,000 of these pumps per year from an overseas supplier at a cost of $84 per pump.

Assume that the Pump Division is selling all of the pumps it can produce to outside customers. What should be the minimum acceptable transfer price for the pumps from the standpoint of the Pump Division?

Multiple Choice

1, $84 per unit

2, $84 per unit

3, $102 per unit

4, $63 per unit

Capacity in units 60,000 Selling price to outside customers $ 102 Variable cost per unit $ 63 Fixed cost per unit (based on capacity) $ 21

Explanation / Answer

When capacity is not spare then minimum transfer price is variable cost+contribution margin to be lost

Contribution margin to be lost = 102-63 = 39

Minimum transfer price = 39+63 = 102

so answer is 3) $102 per unit

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