Part 43X costs the Southern Division of Norris Corporation $26 to make - direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $3.Southern Division sells Part 43X to other companies for $30.The Northern Division of Norris Corporation can use Part 43X in one of its products.The Southern Division has enough idle capacity to produce all of the units of Part 43X that the Northern Division would require.What is the lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division?

Question

Quizplus · Accepted Answer

The lowest transfer price at which the Southern Division should be willing to sell Part 43X to the Northern Division is the variable cost of producing the product plus any opportunity cost. The variable cost of producing Part 43X is $10 + $4 + $9 = $23. Since the Southern Division has idle capacity, there is no opportunity cost associated with producing this product, so the lowest transfer price should be $23. Selling at a price lower than $23 would result in a loss for the Southern Division. Selling at a higher price would benefit the Southern Division but would not be a cost-effective choice for the Northern Division. Therefore, the best choice is C.

Part 43X Costs the Southern Division of Norris Corporation $26