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What is the lowest acceptable transfer price

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Question - Umi Corp. has two divisions: Parts and Assembly. The Parts Division makes Part P2 for sale to outside customers:

Production capacity 25,000 units per month

Demand from outside customers 23,000 units per month

Per unit data for P2 for outside customers:

Selling price $20.00

Variable production cost $15.00

Variable selling cost $2

Allocated fixed cost $1.25

The Assembly Division has designed a new product that also uses Part P2. For its new product, the Assembly Division would need 3,100 units of P2 each month, and the Parts Division would not incur variable selling costs for these units.

Required - Assuming the Parts Division would cut back on sales to outside customers in order to supply P2 to the Assembly Division (if necessary), what is the lowest acceptable transfer price from the viewpoint of the selling division?

Reference no: EM132543037

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