Manni Products, Inc., has a Pump Division that manufactures and sells a number of products, including a standard pump. Data concerning that pump appear below:?Capacity in units68,000?Selling price to outside customers$68?Variable cost per unit$38?Fixed cost per unit (based on capacity)$23The company has a Pool Products Division that needs 7,000 special heavy-duty pumps per year. The Pump Division's variable cost to manufacture and ship this special pump would be $43 per unit. Making these special pumps would require more manufacturing resources. Therefore, the Pump Division would have to reduce its production and sales of regular pumps to outside customers from 68,000 units per year to 56,100 units per year.Required:As far as the Pump Division is concerned, what is the lowest
acceptable transfer price for the special pumps?
What will be an ideal response?
To produce the 7,000 special pumps, the Pump Division will have to give up sales of 11,900 of the regular pumps to outside customers.
| ? | Selling price to outside customers | $68 |
| ? | Variable cost per unit | $38 |
| ? | Unit contribution margin | $30 |
| ? | Reduction in outside unit sales | 11,900 |
| ? | Total contribution margin on lost sales | $357,000 |
From the perspective of the selling division, profits would increase as a result of the transfer if and only if:
Transfer price > Variable cost per unit + (Total contribution margin on lost sales ÷ Number of units transferred)
Transfer price > $43.00 per unit + ($357,000 ÷ 7,000 units) = $43.00 per unit + $51.00 per unit = $94.00 per unit
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