Question

The Can Division of Vaughn Manufacturing manufactures and sells tin cans externally for $1.20 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.10, respectively. The Packaging Division wants to purchase 50,000 cans at $0.34 a can. Selling internally will save $0.03 a can. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? $0.86 $0.71 $1.17 $0.27

Answer 1

Minimum transfer price = $1.17

Step-by-step explanation:

The Can Division is operating at full capacity, hence it has no excess capacity .

This implies that it can not produce enough to meet both the internal and external buyers.

Since Division X can not accommodate the demands of the Packaging Division at a price lower than the external price, because it will result to a loss in contribution.

To maximize and optimize the group profit

Minimum transfer price = External selling price - savings in internal transfer cost

= $1.20 - 0.03 = $1.17

Minimum transfer price = $1.17