Part 43X costs the Southern Division of Norris Corporation $26 to produce. Making up that cost are direct materials of $10, direct labor of $4, variable manufacturing overhead of $9, and fixed manufacturing overhead of $3. Southern Division sells Part 43X to other companies for $30. The Northern Division of Norris Corporation can use Part 43X in one of its products. The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require. What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?
A) $30.
B) $26.
C) $23.
D) $27.

Question

Quizplus · Accepted Answer

The lowest transfer price should cover the variable costs, which are $10 (direct materials) + $4 (direct labor) + $9 (variable manufacturing overhead) = $23. Fixed costs are not considered since there is idle capacity.

Part 43X Costs the Southern Division of Norris Corporation $26