# 4 per unit in variable costs and would require that

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4. per unit in variable costs and would require that Division A cut back production of its present product by Transfer Price to maximize company profits: TP = Out of pocket costs / unit + (Total contribution margin given up on lost sales) / units transferred Proof: Division A: Contribution margin generated under the current situation \$450,000 Contribution margin generated if a transfer takes place at \$32.50 per unit \$450,000 Division A manager is indifferent to selling outside or transferring to Division B at a TP of \$32.50. Refer to case 1 above. A study has indicated that Division A can avoid \$5 per unit in variable costs on TP = ( \$63 - \$5 ) + (\$37 X 10,000 )/ 10,000 = \$58 + \$37 = \$95 Refer to case 2 above. Assume that Division A can avoid \$4 per unit in variable costs on any sales to TP = ( \$19 - \$4 ) + (\$21 X 70,000 )/ 70,000 = \$15 + \$21 = \$36 Assume that Division A offers to sell 70,000 units to Division B for \$38 per unit and that Division B Refer to case 3 above. Assume that Division B is now receiving a 5% price discount from the outside TP = \$35 + (\$0 X 20,000 )/ 20,000 = \$35 + \$0 = \$35 Assume that Division B offers to purchase 20,000 units from Division A at \$52 per unit. If Division A Refer to case 4 above. Assume that Division B wants Division A to provide it with 60,000 units of a different product from the one that Division A is now producing. The new product would require \$25 30,000 units annually. What is the lowest acceptable transfer price from Division A's perspective? TP = \$25 + (\$15 X 30,000 ) / 60,000 = \$25 + (\$450,000 / 60,000 ) = \$25 + \$7.50 = \$32.50
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