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Determine the lowest acceptable transfer price

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Question - Alto Company produces and sells bags that can either be sold to outside customers or transferred to its subsidiary company. The following data for the last year is available:

Alto Company:

Production capacity 18,000 bags

Selling price per bag to external customers R20

Variable production cost per bag R10

Variable selling cost per bag R4

Subsidiary company

Number of bags needed annually 6,000

Price per bag paid to an external supplier R16

Alto Company will avoid R3 per bag in selling costs by selling to its subsidiary. If Alto Company can sell only 10,000 bags annually to external customers, determine the lowest acceptable transfer price from the viewpoint of the selling division.

Reference no: EM132997657

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