7. The North division of a Company makes cellphones screens. The capacity is 60,

Question

7. The North division of a Company makes cellphones screens. The capacity is 60,000 screens. The
division has the option of selling the screen to the South division who produces iPhone replicas or to
outside costumers. The price to outside costumers is $19 and unit manufacturing costs are $13 and unit
fix costs are $2. As of now, the South division requires 20,000 screens yearly paying an outside supplier
$33 a screen. Assume outside customers only require 50,000 units yearly from the North division. What
is the variable selling cost per unit (which applies only to outside costumers) if the lowest acceptable
transfer price that the North would accept from the South is $15.25?

Explanation / Answer

As the total capacity of North division is 60,000 screens and sales to outside customers is 50,000 screens and the South division requires 20,000 units. Therefore North division will loss contribution on 10,000 screens which it is previously selling to outside customers

Acceptable transfer Price will equal to variable cost plus the contribution loss on 10,000 screens which it can earn from outside customers.

Acceptable Transfer Price = MC+[(SP-MC-V)*10,000/20,000]

Where SP = Selling Price to outside customers = $19

MC = Manufacturing cost per unit = $13

V = Variable selling cost per unit (to be calculated)

Acceptable Transfer Price = $15.25

$15.25 = $13+[($19-$13-$V)*10,000/20,000]

$15.25-$13 = [($6-$V)*0.50]

$2.25 = $6*0.50-0.50V

0.50V = $3-$2.25

V = $0.75/0.50 = $1.50

Therefore the variable selling cost per unit to outside customer is $1.50

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