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What is the lower limit on the transfer price

    Assignment Instructions

    Assignment ID: FG133134537

    Question – Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:

    Selling Price to Outside Customers $51,800

    Variable cost per Unit $25

    Total Fixed Costs $401,000

    Capacity in Units 25,000

    Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $50 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y’s needs without any increase in fixed costs and without cutting into outside sales. According to the transfer pricing formula, what is the lower limit on the transfer price?

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