The Assembly Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Divison for $104 per unit. Currently, Electrical Division is producing 250,000 batteries per year and the production costs per battery are as follows:

Electrical Division:

Direct materials, $40
Direct labor, 20
Variable factory overhead, 12
Fixed factory overhead, 40
Total, $ 112

The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each. Capacity is 250,000 batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each.

A. What is the transfer price range?

B. From the company's perspective, if a transfer is made, how much more or less will firm profits be?

The acceptable transfer price ranges between the variable costs of the producing department or the variable costs plus a calculated opportunity cost.

The opportunity cost represents the lost cost with the transfer when the division could have gone ahead with an external sale instead.

Data and Calculations:

Offer from the Assembly Division = 90,000 batteries

Offer transfer price = $104 per unit

Current production per year = 250,000 units

Current external selling price = $136 per unit

External cost per unit = $130

Production Costs of the Electrical Division:

Direct materials, $40

Direct labor, 20

Variable factory overhead, 12

Total variable costs per unit = $72

Opportunity cost per unit = $64 ($136 - $72)

Fixed factory overhead, 40

Total, $ 112

A. The transfer price range is between $112 and $136.

B. If a transfer is made at $130, the firm profits will be less by $1,500,000 (250,000 x $130 - $136).

Learn more about acceptable transfer prices at https://brainly.com/question/23411982 and https://brainly.com/question/24279136

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