Almond Delights is a farm that harvests almonds and sells them to both external customers and to some internal business units when the deal makes fiscal sense. Almond Delights' Farm business unit is having a very successful year and provided the following information: The Almond Milk business unit of Almond Delights would like to purchase 13,490 pounds of almonds from the Farm business unit. If the Farm business unit is operating at full capacity, then what will the minimum acceptable transfer price be? (Do not round your calculations.)

Question

Almond Delights is a farm that harvests almonds and sells them to both external customers and to some internal business units when the deal makes fiscal sense. Almond Delights' Farm business unit is having a very successful year and provided the following information:  The Almond Milk business unit of Almond Delights would like to purchase 13,490 pounds of almonds from the Farm business unit. If the Farm business unit is operating at full capacity, then what will the minimum acceptable transfer price be? (Do not round your calculations.)

Quizplus · Accepted Answer

This question requires familiarity with calculating the minimum acceptable transfer price. Since the factory is already at capacity, the minimum acceptable transfer price would be equal to its variable cost per unit plus the contribution margin per unit on external sales. Variable cost per unit = ($15,460 + $39,245 + $60,732)/167,300 pounds = $115,437/167,300 pounds = $0.69 per pound. Contribution margin per unit = ($260,988 - $115,437)/167,300 pounds = $0.87 per pound. The minimum acceptable transfer price is $0.69 + $0.87 = $1.56 per pound (Choice C).

Almond Delights Is a Farm That Harvests Almonds and Sells