Question

The Mixed Nuts Division of Yummy Snacks, Inc. had the following operating results last year:

Sales (140,000 pounds of product) $70,000
Variable expenses $42,000
Contribution margin $28,000
Fixed expenses $12,000
Income $16,000
Yummy expects identical operating results in the division this year. The Mixed Nuts Division has the ability to produce and sell 200,000 pounds of product annually. Assume that the Trail Mix Division of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.
Mixed Nuts will be able to increase its profit by accepting any transfer price above:___________.
a) $0.25 per pound
b) $0.08 per pound
c) $0.15 per pound
d) $0.30 per pound
e) $0.10 per pound

Answer 1

Mixed Nuts will be able to increase its profit by accepting any transfer price above $0.30 per pound. The right answer is d.

Step-by-step explanation:

In order to calculate the minimum transfer price so Mixed Nuts will be able to increase its profit we would have to make the following calculation:

minimum transfer price= Variable expenses/pounds of product

Variable expenses=$42,000

pounds of product=140,000

minimum transfer price=$42,000/140,000

minimum transfer price=$0.30

Mixed Nuts will be able to increase its profit by accepting any transfer price above $0.30 per pound