Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | }
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the minimum transfer price that Extruding would be willing to accept?
A) $1.00.
B) $1.10.
C) $1.25.
D) $1.30.

Question

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | } 
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the minimum transfer price that Extruding would be willing to accept? 
A) $1.00.
B) $1.10.
C) $1.25.
D) $1.30.

Quizplus · Accepted Answer

The Extruding Division has idle capacity that cannot be used, which means that it has no opportunity cost for producing the handles. Therefore, the minimum transfer price that Extruding Division would be willing to accept is its variable cost, which is $1.10 per unit. If it sells the handles to Polishing Division at a price lower than the variable cost, it would be better off not producing the handles at all. Therefore, Martin Company can use the variable cost of $1.10 as the minimum transfer price for the handles.

Martin Company Currently Manufactures All Component Parts Used in the Manufacture