Creaser Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below:
The 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?

Question

Creaser Products, Incorporated, has a Sensor Division that manufactures and sells a number of products, including a standard sensor. Data concerning that sensor appear below:

The 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?

Hannah Davis · Accepted Answer

Final Answer : The total contribution margin on lost sales is computed as follows: 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 class=answers-bank-image d-block rel=preload > 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 unitFrom the perspective of the purchasing division, the transfer is financially attractive if and only if:Transfer price < Cost of buying from outside supplierTransfer price < $76 per unitCombining the two requirements, the range of acceptable transfer prices is: $75 per unit < Transfer price < $76 per unit

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