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

Question

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

Quizplus · Accepted Answer

To find the minimum transfer price that the Mixed Nuts Division can accept and still increase its profit, we need to calculate the variable cost per pound of producing and selling 20,000 additional pounds of nuts. The variable cost per pound is:

Variable cost per pound = (Total variable costs for the year) / (Total pounds produced for the year)
Variable cost per pound = ($421,800 + $8,500) / 200,000 pounds
Variable cost per pound = $2.15

Therefore, if the Trail Mix Division wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division, the minimum transfer price that the Mixed Nuts Division can accept and still increase its profit is:

Minimum transfer price = Variable cost per pound + Desired profit per pound
Minimum transfer price = $2.15 + $0.15   (since the operating results are expected to be identical this year)
Minimum transfer price = $2.30

Thus, the Mixed Nuts Division can accept any transfer price above $2.30 per pound and still increase its profit. Only choice D meets this condition.