Creaser Products, Inc., has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below:?Capacity in units42,000?Selling price to outside customers$85?Variable cost per unit$50?Fixed cost per unit (based on capacity)$28The company has a Safety Products Division that could use this sensor in one of its products. The Safety Products Division is currently purchasing 8,000 of these sensors per year from an overseas supplier at a cost of $76 per sensor.Required:The Sensor Division is selling all of the sensors it can produce to outside customers. Also assume that $10 in variable expenses can be avoided on transfers within the company due to reduced shipping and selling costs. What is the acceptable range, if
any, for the transfer price between the two divisions?
What will be an ideal response?
The total contribution margin on lost sales is computed as follows:
| ? | Selling price to outside customers | $85 |
| ? | Variable cost per unit | $50 |
| ? | Unit contribution margin | $35 |
| ? | Reduction in outside unit sales | 8,000 |
| ? | Total contribution margin on lost sales | $280,000 |
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 > $40 per unit + ($280,000 ÷ 8,000 units) = $40 per unit + $35 per unit = $75 per unit
From the perspective of the purchasing division, the transfer is financially attractive if and only if:
Transfer price < Cost of buying from outside supplier
Transfer price < $76 per unit
Combining the two requirements, the range of acceptable transfer prices is: $75 per unit < Transfer price < $76 per unit
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