The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: The total fixed costs would be the same for all the alternatives considered below.
-Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers.What is the lowest transfer price that would not reduce the profits of the Post Division?
A)$0.90
B)$1.35
C)$1.41
D)$1.75

Question

The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division:  The total fixed costs would be the same for all the alternatives considered below.
-Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers.What is the lowest transfer price that would not reduce the profits of the Post Division?
A)$0.90 
B)$1.35 
C)$1.41 
D)$1.75

Quizplus · Accepted Answer

Since the Post Division has excess operating capacity,the opportunity cost is zero.Therefore,the Post Division's profits would not be reduced if the transfer price is at least the variable cost of $0.90 per unit.