Division A produces a product that it sells to the outside market. It has compiled the following: Variable manufacturing cost per unit $9 Variable selling costs per unit $3 Total fixed manufacturing costs $144000 Total fixed selling costs $30000 Per unit selling price to outside buyers $42 Capacity in units per year 30000 Division B of the same company is currently buying an identical product from an outside provider for $39 per unit. It wishes to purchase 6000 units per year from Division A. Division A is currently selling 25000 units of the product per year. If the internal transfer is made, Division A will not incur any selling costs. What would be the minimum transfer price per unit that Division A would be willing to accept? $42.00 $9.00 $14.00
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
| Variable manufacturing cost per unit | $9 |
| Variable selling costs per unit | $3 |
| Total fixed |
$144000 |
| Total fixed selling costs | $30000 |
| Per unit selling price to outside buyers | $42 |
| Capacity in units per year | 30000 |
Division B of the same company is currently buying an identical product from an outside provider for $39 per unit. It wishes to purchase 6000 units per year from Division A. Division A is currently selling 25000 units of the product per year. If the internal transfer is made, Division A will not incur any selling costs. What would be the minimum transfer price per unit that Division A would be willing to accept?
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