Division Big does have excess capacity to produce Product XX.The division can sell Product XX for $10 per unit outside the company.Variable costs are $6 per unit.Division Small wants to purchase Product XX from Division Big to use in Product ZZ.The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit.An outside supplier will sell Product XX for $12.What is the minimum transfer price for Division Big?
A) $4 per unit
B) $6 per unit
C) $10 per unit
D) $12 per unit

Question

Quizplus · Accepted Answer

The transfer price should be at least equal to the opportunity cost of selling the Product XX outside the company, which is $10 per unit. However, since Division Big has excess capacity, it can produce the Product XX without incurring any additional fixed costs. Therefore, the minimum transfer price should be equal to the variable cost of producing the Product XX, which is $6 per unit. This is lower than the outside supplier's price of $12 per unit, but higher than the opportunity cost of selling the Product XX for $10 per unit. Thus, the best choice is B.

Division Big Does Have Excess Capacity to Produce Product XX