A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year: The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing the remaining ounces in Silver's processing capacity. What is the minimum acceptable transfer price on the ounces of silver if the Earrings division purchases them?

Question

A jewelry company has several business units, including their Silver Processing unit and their Earrings unit. The Silver Processing unit typically sells all of its silver to external companies unless an internal division or business unit decides to use them as their supplier. The Earrings unit has decided to add a line of silver hoops to the line of gold hoops they have been selling for several years. Prior to this request, the Silver Processing unit reported the following numbers for the year:  The Silver Processing unit has a capacity of 15,000 ounces of silver, and the Earrings unit has expressed an interest in purchasing the remaining ounces in Silver's processing capacity. What is the minimum acceptable transfer price on the ounces of silver if the Earrings division purchases them?

Quizplus · Accepted Answer

This question requires determination of the minimum acceptable transfer price if this sale takes the Silver Processing unit to capacity without surpassing that. In the given scenario, the minimum acceptable transfer price would be equal to the variable cost per unit. This is calculated by dividing the total variable expenses by the ounces of silver processed. $182,448/14,400 ounces = $12.67 per ounce. Since they are not exceeding capacity, there would not be a need to add any other costs (Choice C).

A Jewelry Company Has Several Business Units, Including Their Silver