Cohasset Company currently manufactures all component parts used in the manufact
ID: 2472781 • Letter: C
Question
Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools. Hurley Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost.
Ironwood Division purchases 22,000 handles from Hurley Division and completes the hand tools. An outside supplier, R & M Steel, has offered to supply 22,000 units of the handle to Ironwood Division for $1.35 per unit. Hurley currently has idle capacity that cannot be used.
If Cohasset would like to develop a range of transfer prices, what would be the minimum transfer price that Hurley would be willing to accept?
A. $1.60
B. $1.35
C. $1.20
D. $1.40
Cohasset Company currently manufactures all component parts used in the manufacture of various hand tools. Hurley Division produces a steel handle used in three different tools. The budget for these handles is 120,000 units with the following unit cost.
Explanation / Answer
Answer B. $1.40
Cost of manufacturing = Material cost + labor cost + variable overhead
Cost of manufacturing = $0.70 + 0.50 + 0.20 = $1.4
Cost if purchase = $1.35
Minimum price would be the Variable cost any opportunity cost = $1.40