Fois Company has two divisions, Division X and Division Y. Division X has a production capacity of 5,000 units of a particular part per month. Division X sells 4,400 units of the part each month to outside customers at a contribution margin of $56 per unit. Division Y would like to buy 800 units of the part each month from Division X. In computing the lowest acceptable transfer price from the perspective of the selling division, the lost contribution margin per unit portion of the transfer price computation would be:

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Angus

Business

2 June, 20:59

Fois Company has two divisions, Division X and Division Y. Division X has a production capacity of 5,000 units of a particular part per month. Division X sells 4,400 units of the part each month to outside customers at a contribution margin of $56 per unit. Division Y would like to buy 800 units of the part each month from Division X. In computing the lowest acceptable transfer price from the perspective of the selling division, the lost contribution margin per unit portion of the transfer price computation would be:

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Royce Conner · Answer 1

Lost contribution per unit = $56 per unit

Explanation:

The Division X is operating at less than full capacity, hence it has excess capacity of 600 units i. e (5000 - 4,400)

This implies that it can only produce to meet the external and a portion of Division Y demand

Since Division X can only accommodate a portion of the internal demand, an opportunity would arise if it decides to meet all the request of Division Y.

Therefore, the minimum transfer price

minimum transfer price = Variable cost + a lost contribution from internal supply

The lost contribution represent the amount Division X would have made had sold the units to external buyers

Lost contribution per unit = $56 per unit