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Answer:
The range of acceptable transfer prices between the two divisions is:
= $83.20 to $100.
Explanation:
a) Data and Calculations:
Selling price per unit (on the outside market) $ 100
Variable cost per unit $ 65
Fixed costs per unit (based on capacity) $ 10
Production capacity in units 30,000
Current sales capacity = 28,000
Units required by another division = 5,000
New sales capacity = 33,000 (28,000 + 5,000)
Total fixed costs per current capacity = $300,000 ($10 * 30,000)
Total production costs = $2,250,000 ($65 * 30,000 + $300,000)
Product cost per unit with old capacity = $75 ($2,,250,000/30,000)
Additional production capacity required for the internal order = 3,000 (33,000 - 30,000)
New total fixed costs for required capacity = $600,000 ($300,000 * 2)
Total production costs = $2,745,000 ($65 * 33,000 + $600,000)
Product cost per unit with new capacity = $83.20 ($2,745,000/33,000)