Question

Divisions M and T are two profit centers of a large, diversified and decentralized firm. Division M has a capacity to make 800,000 units of a product and is currently selling 600,000 units to outsiders. The selling price is $150, variable costs are $90, and fixed costs per unit are $40. Division T is purchasing 150,000 units of the same product made by M from an outside supplier for $144 per unit. If M supplies these products to T, then it can save variable costs of $15 per unit with the internal transfer.

The minimum transfer price from M to T (assuming M supplies these products to T), so that shareholder value is maximized, is:

A. $150
B. $144
C. $90
D. $135
E. $75

Answer 1

Option(c) is the correct answer to the given question .

Step-by-step explanation:

The minimum transfer price is the marginal cost of making one item.or we can say that The net price covers direct labor, direct inventory and direct operating costs but avoids the expenditures cost that would be sustained by the distribution hub .

• The minimum transfer price is equal to the variable cost So in the given question $90 is the variable cost from M to T therefore the minimum transfer price from M to T is $90 So that shareholder value is maximized.
• All the other option will not give the shareholder value maximization that's why they are incorrect option .