Question

The fastener division of Southern Fasteners manufactures zippers and then sells them to customers for $7.60 per unit. Its variable cost is $3.01 per unit, and its fixed cost per unit is $1.28. Management would like the fastener division to transfer 11,600 of these zippers to another division within the company at a price of $3.01. The fastener division could avoid $0.41 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. (Round answer to 2 decimal places, e.g. 10.50.) Minimum transfer price $ 7.60 (b) Assuming the fastener division is operating at full capacity. (Round answer to 2 decimal places, e.g. 10.50.) Minimum transfer price $

Answer 1

The correct answer for option (a) is $2.6 and for option (b) is $7.19.

Step-by-step explanation:

According to the scenario, the given data are as follows:

(a). If fastener division is not operating at full capacity,

then, opportunity cost = $0

Here, variable cost = $3.01

Fastener could avoid $0.41.

Then Variable cost = $3.01 - $0.41 = $2.6

So, we can calculate the minimum transfer price by using following formula:

Minimum transfer price = Variable cost + Opportunity cost

= $2.6 + $0

= $2.6

(b). If fastener division is operating at full capacity,

then, opportunity cost = $7.60 - $3.01 = $4.59

Here, variable cost = $3.01

Fastener could avoid $0.41.

Then Variable cost = $3.01 - $0.41 = $2.6

So, we can calculate the minimum transfer price by using following formula:

Minimum transfer price = Variable cost + Opportunity cost

= $2.6 + $4.59

= $7.19