Pampered Pooches, Inc. is a factory that produces organic dog food and treats. The Oatmeal Biscuit business unit of Pampered Pooches made all sales of its product to external customers and is currently operating near their full capacity of 55,000 pounds. Oatmeal reported $42,350 of sales (50,000 pounds of biscuits), variable expenses of $26,809, and fixed expenses of $11,504. The Variety Box business unit of Pampered Pooches has asked if the Oatmeal Biscuit unit could sell them 8,700 pounds of biscuits to include with their upcoming run of new variety boxes. What will the minimum acceptable transfer price be if they do produce and sell the demanded pounds to Variety Box?

Question

Quizplus · Accepted Answer

This question requires familiarity with how to calculate the minimum acceptable transfer price if a seller has idle capacity and what the minimum acceptable transfer price would be if a seller has no idle capacity. When there is no idle capacity, the minimum acceptable transfer price would be equal to its variable cost per unit plus the contribution margin per unit on external sales. Or to simplify, it will be equal to the market price. This is calculated by dividing the sales by the pounds of biscuits sold. $42,350/50,000 pounds = $0.847 or $0.85 per pound. For units when there is idle capacity, the minimum acceptable transfer price would be the variable cost per unit: $26,809/50,000 pounds = $0.54 per pound (Choice C).