Question

The fastener division of Southern Fasteners manufactures zippers and then sells them to customers for $8 per unit. Its variable cost is $3 per unit, and its fixed cost per unit is $1.50. Management would like the fastener division to transfer 12,000 of these zippers to another division within the company at a price of $3. The fastener division could avoid $0.20 per zipper of variable packaging costs by selling internally.

Determine the minimum transfer price:
(a) Assuming the fastener division is not operating at full capacity, and
(b) Assuming the fastener division is operating at full capacity.

Answer 1

• a. $2.80
• b. $7.80

Step-by-step explanation:

a. Assuming the fastener division is not operating at full capacity

When the division is not operating at full capacity, they have space to take on the production requests for other divisions and so won't incur any opportunity costs from not producing for outside customers.

Minimum transfer price = Net Variable cost

= Variable cost - cost saving if sold internally

= 3 - 0.2

= $2.80

b. Assuming the fastener division is operating at full capacity.

At full capacity the division does not have space to produce for internal divisions without incurring losses from not selling outside. The transfer price will therefore be the selling price to customers less the variable cost savings:

= Selling price - variable cost savings

= 8 - 0.2

= $7.80