The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation: The Tortilla Chip business unit sold 69,870 bags in year one, and they sold 75,433 bags in their second year. In the first year, they had operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. Which of the following is an accurate representation of the difference in minimum acceptable transfer price between the two years? (Round per unit cost to two decimal places.)
A) With idle capacity, the unit transfer price is $0.02 higher in Year 1 than Year 2.
B) With idle capacity, the unit transfer price is $0.02 higher in Year 2 than Year 1.
C) With no idle capacity, the unit transfer price is $0.04 higher in Year 1 than Year 2.
D) With no idle capacity, the unit transfer price is $0.04 higher in Year 2 than Year 1.

Question

The Tortilla Chip business unit at Chipz Corp has reported the following results for years 1 and 2 of their operation:  The Tortilla Chip business unit sold 69,870 bags in year one, and they sold 75,433 bags in their second year. In the first year, they had operating capacity of 75,000 bags and fulfilled a special order for an internal department of 12,465 bags. In the second year, they had operating capacity of 80,000 bags and fulfilled a special order for an internal department of 14,788 bags. Which of the following is an accurate representation of the difference in minimum acceptable transfer price between the two years? (Round per unit cost to two decimal places.)
A) With idle capacity, the unit transfer price is $0.02 higher in Year 1 than Year 2. 
B) With idle capacity, the unit transfer price is $0.02 higher in Year 2 than Year 1. 
C) With no idle capacity, the unit transfer price is $0.04 higher in Year 1 than Year 2. 
D) With no idle capacity, the unit transfer price is $0.04 higher in Year 2 than Year 1.

Quizplus · Accepted Answer

This question requires calculation of the minimum acceptable price for both idle capacity and no idle capacity. This will result in two different minimum acceptable transfer prices. These calculations must be completed for both years. These are needed to perform comparison calculations.
Year 1: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 75,000 - 69,870 = 5,130 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 5,130 units will be equal to the variable cost per unit, which is equal to $94,200/69,870 = $1.35 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $84,703. Now, divide this by the units sold: $84,703/69,870 = $1.21 per unit. The minimum acceptable transfer price = $1.35 + $1.21 = $2.56 per unit.
Year 2: To determine how many are subject to each price, subtract the sales from the high threshold of the capacity. 80,000 - 75,433 = 4,567 units can still be produced before hitting capacity. The minimum acceptable transfer price of the 4,567 units will be equal to the variable cost per unit, which is equal to $103,343/75,433 = $1.37 per unit. Any units produced with no idle capacity will have a minimum acceptable transfer price of the variable cost per unit plus the contribution margin per unit. Contribution margin = $91,274. Now, divide this by the units sold: $91,274/75,433 = $1.21 per unit. The minimum acceptable transfer price = $1.37 + $1.21 = $2.58 per unit. 
Difference in minimum acceptable transfer price with no idle capacity: Year 2: $2.58 - Year 1: $2.56 = $0.02. 
Difference in minimum acceptable transfer price with idle capacity: Year 2: $1.37 - Year 1: $1.35 = $0.02. 
In both the scenarios, Year 2's minimum acceptable transfer price is $0.02 higher than Year 1 (Choice A).

The Tortilla Chip Business Unit at Chipz Corp Has Reported