Part AR3 costs the Southwestern Division of Luxon Corporation $26 to make-direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $3.Southwestern Division sells Part AR3 to other companies for $30.The Northeastern Division of Luxon Corporation can use Part AR3 in one of its products.The Southwestern Division has enough idle capacity to produce all of the units of Part AR3 that the Northeastern Division would require.What is the lowest transfer price at which the Southwestern Division should be willing to sell Part AR3 to the Northeastern Division?
A)$30
B)$26
C)$23
D)$27
E)$21

Question

Quizplus · Accepted Answer

The lowest transfer price at which the Southwestern Division should be willing to sell Part AR3 to the Northeastern Division is the variable cost per unit plus any additional opportunity cost incurred by the selling division. In this case, the variable cost per unit is $10 + $4 + $9 = $23. Since the Southwestern Division has enough idle capacity, there is no opportunity cost to consider. Therefore, the lowest transfer price should be $23. Any price below that would result in a loss for the Southwestern Division. Choice A is incorrect because $30 is the selling price to other companies, not the transfer price between divisions. Choice B is incorrect because it does not take into account the variable manufacturing overhead cost. Choice D and E are too high and would result in a higher profit margin for the Southwestern Division.

Part AR3 Costs the Southwestern Division of Luxon Corporation $26