The crinkle-cut division for a French fry company had the following results last year with all production sold to outside customers: The crinkle-cut division has a 30,000-pound processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum additional amount of profit be?
A) $0
B) $800
C) $4,000
D) $4,800

Question

The crinkle-cut division for a French fry company had the following results last year with all production sold to outside customers:  The crinkle-cut division has a 30,000-pound processing capacity. If the crinkle-cut division were to transfer the remaining capacity to an internal division or unit, what would the minimum additional amount of profit be?
A) $0 
B) $800 
C) $4,000 
D) $4,800

Quizplus · Accepted Answer

This question requires familiarity with how transfer pricing is calculated when a company has excess capacity and the additional profit this would create. To determine the minimum acceptable transfer price, calculate the variable cost per unit: Variable Expenses/Number of Units Produced = $4,000/25,000 = $0.16 per pound. Selling 5,000 pounds at $0.16 would bring additional sales of 5,000 × $.016 = $800 and variable costs of $800. The question asked how much profit would be generated, and the answer is $0 as the variable costs cancel out the additional sales (Choice A).

The Crinkle-Cut Division for a French Fry Company Had the Following