Rivers Industries produces and sells electronic sound equipment.The company has production capacity of 20,000 units and currently production schedule is for 18,000 units.Each unit has a selling price of $25, variable product cost of $15, and variable selling cost of $2.Another division wishes to purchase 500 units.If Rivers sells the units to the other division, it will avoid $1 of the variable selling costs.What is the minimum transfer price that will maximize corporate profits?

Question

Quizplus · Accepted Answer

To maximize corporate profits, we need to ensure that the selling price is greater than the total variable cost per unit (i.e. the sum of variable product cost and variable selling cost).

Total variable cost per unit = $15 + $2 = $17
Therefore, the minimum transfer price that will maximize corporate profits is $17 per unit.

Selling to the other division would save $1 of variable selling costs, so the transfer price can be reduced by $1 to $16 per unit. At this price, Rivers would still earn a profit of $9 per unit ($25 selling price - $15 variable product cost - $1 variable selling cost - $16 transfer price), which is greater than the total variable cost per unit of $17.

Therefore, the best choice is (C) $16.

Rivers Industries Produces and Sells Electronic Sound Equipment