The Milk Chocolate Division of Mmmm Foods,Inc.had the following operating results last year: Milk Chocolate expects identical operating results this year.The Milk Chocolate Division has the ability to produce and sell 200,000 pounds of chocolate annually.Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000 pounds of chocolate from the Milk Chocolate Division.Milk Chocolate will be able to increase its profit by accepting any transfer price above:
A)$0.40 per pound
B)$0.08 per pound
C)$0.15 per pound
D)$0.25 per pound
E)$0.10 per pound

Question

The Milk Chocolate Division of Mmmm Foods,Inc.had the following operating results last year:  Milk Chocolate expects identical operating results this year.The Milk Chocolate Division has the ability to produce and sell 200,000 pounds of chocolate annually.Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000 pounds of chocolate from the Milk Chocolate Division.Milk Chocolate will be able to increase its profit by accepting any transfer price above:
A)$0.40 per pound 
B)$0.08 per pound 
C)$0.15 per pound 
D)$0.25 per pound 
E)$0.10 per pound

Quizplus · Accepted Answer

Because the Milk Chocolate Division has ample excess capacity and consequently there is no opportunity cost, the profit of the division would be increased by any transfer price in excess of its variable cost of $0.25 per pound (= $37,500 F1F1F1S1F1F1F10 150,000 pounds).