The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available for the last year:

By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs.
-If Red River can sell 15,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$20 per bag
B)$16 per bag
C)$11 per bag
D)$14 per bag

Question

The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available for the last year:

By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs.
-If Red River can sell 15,000 bags annually to outside customers, according to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A)$20 per bag 
B)$16 per bag 
C)$11 per bag 
D)$14 per bag

Quizplus · Accepted Answer

Based on the formula mentioned in the text, the lowest acceptable transfer price is equal to variable cost per unit plus opportunity cost per unit. Red River can sell 15,000 bags annually to outside customers, which means they have an opportunity cost of losing sales revenue if they transfer the bags internally. Assuming the variable cost per unit of the selling division is $10, the lowest acceptable transfer price from the viewpoint of the selling division would be $14 ($10 variable cost + $4 opportunity cost). Therefore, option D is the best choice.

The Red River Division of Alto Company Produces and Sells