Two of the decentralized divisions of Gamberi Electronics Corporation are the Plastics Division and the Components Division. The Plastics Division sells molded parts to both the Components Division and to customers outside the corporation.Assume that the Plastics Division is currently operating at full capacity. Also assume that the Components Division wants to increase the number of parts it purchases from Plastics. In order to maintain its current level of profitability, the Plastics Division should not accept any transfer price on these additional parts that is below the:

A) variable cost of the additional parts.
B) full (absorption) cost of the additional parts.
C) variable cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.
D) full (absorption) cost of the additional parts plus the lost contribution margin on all units that could no longer be sold to customers outside the corporation.

Question

Jamesia Myrtle · Accepted Answer

Final Answer : C, Explanation :  Since the Plastics Division is operating at full capacity, selling additional parts to the Components Division means it would have to forego sales to external customers. Therefore, the minimum acceptable transfer price should cover not only the variable cost of producing these additional parts but also the lost contribution margin from sales that could not be made to external customers.

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