Answer the following questions using the information below:
Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below:
The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000 pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.90 per pound.
-What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 120% of full costs?
A)$0.60
B)$0.72
C)$0.90
D)$1.10

Question

Answer the following questions using the information below:
Greenlawn Corporation has two divisions, Distribution and Production. The company's primary product is fertilizer. Each division's costs are provided below:
  The Distribution Division has been operating at a capacity of 4,000,000 pounds a week and usually purchases 2,000,000 pounds from the Production Division and 2,000,000 pounds from other suppliers at $0.90 per pound.
-What is the transfer price per barrel from the Production Division to the Distribution Division, assuming the method used to place a value on each pound of fertilizer is 120% of full costs?
A)$0.60 
B)$0.72 
C)$0.90 
D)$1.10

Quizplus · Accepted Answer

To determine the transfer price per pound, we need to first calculate the full cost per pound for Production Division. The full cost per pound for Production Division is $0.50 ($800,000 costs divided by 1,600,000 pounds produced).

Next, we need to determine the value placed on each pound of fertilizer. The question states that the method used is 120% of full costs, so the value placed on each pound is $0.60 ($0.50 x 120%).

Therefore, the transfer price per pound from Production Division to Distribution Division is $0.60.

The best choice(s) is/are B because it is the correct answer and the explanation shows the steps used to arrive at the answer.

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