Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | }
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the maximum transfer price that Polishing would be willing to pay?

Question

Martin Company currently manufactures all component parts used in the manufacture of various hand tools.The Extruding Division produces a steel handle used in three different tools.The budget for these handles is 120,000 units with the following unit cost.$$\begin{array} { | l | r | } 
\hline \text { Direct material } & \$ .60 \
\hline \text { Direct labor } & .40 \
\hline \text { Variable overhead } & .10 \
\hline \text { Fixed overhead } & \underline{.20} \
\hline \text { Total unit cost } & \$ 1.30 \
\hline
\end{array}$$Polishing Division purchases 20,000 handles from the Extruding Division and completes the hand tools.An outside supplier,Venture Steel,has offered to supply 20,000 units of the handle to Polishing Division for $1.25 per unit.The Extruding Division currently has idle capacity that cannot be used.If Martin would like to develop a range of transfer prices,what would be the maximum transfer price that Polishing would be willing to pay?

Quizplus · Accepted Answer

Since the Extruding Division has idle capacity, the opportunity cost for producing the steel handles internally is zero. Therefore, the maximum transfer price that Polishing Division would be willing to pay is the cost of purchasing 20,000 units of the handle from Venture Steel, which is $1.25 per unit. Any transfer price above this would be more expensive for Polishing Division than purchasing from the outside supplier. Therefore, choice C is the best option.

Martin Company Currently Manufactures All Component Parts Used in the Manufacture