The Hinges Division of Altoona Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40 and has a variable cost per unit of $22 and a fixed cost per unit of $10. The Hinges Division has a capacity to produce 100,000 units per period. The Door Division currently purchases 10,000 units of part Z-25 from the Hinges Division for $40. The Door Division has been approached by an outside supplier willing to supply the parts for $36.
- If Altoona uses a negotiated transfer pricing system, what is the minimum transfer price that should be charged for this transaction?
A) $40.
B) $36.
C) $32.
D) $22.

Question

Quizplus · Accepted Answer

The minimum transfer price should cover the variable cost, which is $22, as the Hinges Division has excess capacity and no opportunity cost for selling internally.

The Hinges Division of Altoona Corporation Sells 80,000 Units of Part