Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. There is no external market for durian juice concentrate; however, the Durian Division can use its facilities to manufacturer prune paste, which is a very popular product with unlimited external demand, at $13 per unit. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, and the variable production cost of one unit of prune paste is $8. Durian division also incurs $1 additional shipping cost per unit when selling prune paste to external suppliers.
Using the transfer pricing formula, what is the per unit opportunity cost of selling one unit of durian juice concentrate to Juice Division?
A) $0
B) $4
C) $5
D) $12

Question

Quizplus · Accepted Answer

The opportunity cost of selling one unit of durian juice concentrate to the Juice Division is the net benefit forgone from the next best alternative use of the resources, which is manufacturing and selling prune paste. The selling price of prune paste is $13, and the variable cost is $8, with an additional $1 shipping cost, making the total cost $9. Therefore, the opportunity cost per unit is $13 - $9 = $4.

Fruities Ltd Has Two Divisions, Durian Division and Juice Division