Division T of Clocker Company makes a timer which it sells for $30 to outside cu
ID: 2482195 • Letter: D
Question
Division T of Clocker Company makes a timer which it sells for $30 to outside customers.
By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs.
If Red River can sell 15,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
$20 per bag
$16 per bag
$11 per bag
$14 per bag
Red River Division: Production capacity 18,000 bags Selling price per bag to outside customers $20 per bag Variable production cost per bag $10 per bag Variable selling cost per bag $4 per bagExplanation / Answer
The lowest acceptable transfer price is the price at which selling price is equal to variable cost, so that the seller doesn't suffer aany loss. The mininum accepatble price should be equal to or higher than the variable cost.
In the above question , the minimum acceptable transfer price is $ 14 i.e sum total of Variable production cost & Variable selling cost.