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What is the transfer price

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Question - XYZ Company's audio division produces a speaker that is widely used by manufacturers of various audio products. Sales and cost data on the speaker follow:

Selling price per unit on the intermediate market $60.00

Variable production cost per unit 42.00

Variable selling costs per unit 3.00

Fixed production costs per unit (based on capacity)8.00

The Audio Division has capacity to produce 25,000 speakers each year.

Company has just formed a Hi-Fi Division that could use this speaker in one of its products. The Hi-Fi Division would need 5,000 speakers per year. The Audio Division does not incur any variable selling costs for internal transfers.

1. If the Audio Division can sell its entire output (25,000 speakers) externally at $60/unit, what is the transfer price that the Audio Division should quote the Hi-Fi Division for 5,000 speakers?

2. Assume instead that the Audio Division's current market demand is only 20,000 speakers per yar. By how much is Company made better or worse off if the Hi-Fi Division buys the 5,000 speakers from an external supplier at $60/unit?

Reference no: EM131695827

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