Question

Genesis Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60. The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

Answer 1

Hence, the minimum transfer price = $2

Step-by-step explanation:

Transfer price is the price at which goods are exchange between branches or divisions of the same group

Where a division is operating at the less than the existing capacity, to optimist the group profit, the minimum transfer price should be set as follows

Minimum transfer price = Variable cost

It is worthy of note that there is no opportunity cost associated with any transfer to the Cologne division because the Bottle division is currently having excess capacity- it can meets all demands both external and internal.

Therefore, any offering price equal to or above the variable manufacturing cost of $2 would be acceptable and optimize the group profit.

Hence, the minimum transfer price = $2