Vandermeer Products, Incorporated, has a Antennae Division that manufactures and sells a number of products, including a standard antennae. Data concerning that antennae appear below:
The company has a Aircraft Products Division that could use this antennae in one of its products. The Aircraft Products Division is currently purchasing 11,000 of these antennaes per year from an overseas supplier at a cost of $88 per antennae.
Required:
a. Assume that the Antennae Division is selling all of the antennaes it can produce to outside customers. What is the acceptable range, if any, for the transfer price between the two divisions?b. Assume again that the Antennae Division is selling all of the antennaes it can produce to outside customers. Also assume that $1 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?

a. The total contribution margin on lost sales is computed as follows:

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 > $50 per unit + ($517,000 ÷ 11,000 units) = $50 per unit + $47 per unit = $97 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 < $88 per unit
No transfer will be made between the two divisions because the minimum price that the selling division is willing to accept is greater than the maximum price that the buying division is willing to pay.
b. The total contribution margin on lost sales is computed as follows:
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 > $49 per unit + ($517,000 ÷ 11,000 units) = $49 per unit + $47 per unit = $96 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 < $88 per unit
No transfer will be made between the two divisions because the minimum price that the selling division is willing to accept is greater than the maximum price that the buying division is willing to pay.