Sally is compiling some numbers for the factory where she works. This factory has many business units, and some sell to external customers only, some sell internally only, and some sell to both internal and external customers. She is specifically looking at Business Unit A which sells primarily to external customers but will also sell to other internal business units. Business Unit A currently has no idle capacity, $2.97 per unit of opportunity cost, and $189,650 in fixed costs. Determine the overall variable cost if business unit A had sales of 75,000 units for a total of $322,500.
A) $33,100
B) $99,750
C) $222,750
D) $322,500

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for the minimum acceptable transfer price when there is no idle capacity: variable cost per unit + opportunity cost per unit. And, the minimum acceptable transfer price in this case will be equal to the sales price per unit to external customers = $322,500/75,000 units = $4.30 per unit. Now, substitute these numbers into the formula after rearranging it: $4.30 (minimum acceptable transfer price) - $2.97 (opportunity cost per unit) = $1.33 (variable cost per unit). Lastly, multiply the variable cost per unit by the number of units sold externally: $1.33 × 75,000 = $99,750 (Choice B).

Sally Is Compiling Some Numbers for the Factory Where She