ractor Division makes a part that it sells to customers outside of the company. Data concerning this part appear below: Selling price to outside customers $ 38 Variable cost per unit $ 26 Total fixed costs $ 402,000 Capacity in units 30,500 Assembly Division of the same company would like to use the part manufactured by Tractor Division in one of its products. Assembly Division currently purchases a similar part made by an outside company for $37 per unit and would substitute the part made by Tractor Division. Assembly Division requires 5,020 units of the part each period. Tractor Division has ample excess capacity to handle all of Assembly Division’s needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division? Multiple Choice $34 $38 $26 $37
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.
ractor Division makes a part that it sells to customers outside of the company. Data concerning this part appear below:
| Selling price to outside customers | $ 38 |
|---|---|
| Variable cost per unit | $ 26 |
| Total fixed costs | $ 402,000 |
| Capacity in units | 30,500 |
Assembly Division of the same company would like to use the part manufactured by Tractor Division in one of its products. Assembly Division currently purchases a similar part made by an outside company for $37 per unit and would substitute the part made by Tractor Division. Assembly Division requires 5,020 units of the part each period. Tractor Division has ample excess capacity to handle all of Assembly Division’s needs without any increase in fixed costs and without cutting into outside sales. What is the lowest acceptable transfer price from the standpoint of the selling division?
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$34
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$38
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$26
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$37
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