Fragrance Pty Ltd has two divisions: the Cologne Division and the Bottle Division. The company is decentralised and each division is evaluated as a profit centre. The Bottle Division produces bottles that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost per unit is $2.00 and shipping costs are $0.10 per unit. The Bottle Division's external sales price is $3.00 per unit. No shipping costs are incurred on sales to the Cologne Division. The Cologne Division can purchase similar bottles in the external market for $2.50.
The Bottle Division has sufficient capacity to meet all external market demands in addition to meeting the demands of the Cologne Division. Using the general rule, the minimum transfer price from the Bottle Division to the Cologne Division would be:
A) $2.00
B) $2.10
C) $2.50
D) $2.90

Question

Quizplus · Accepted Answer

The minimum transfer price should cover the variable costs of the selling division, which in this case is the Bottle Division. The variable manufacturing cost per unit is $2.00, and since no shipping costs are incurred on internal transfers, the minimum transfer price is $2.00.

Fragrance Pty Ltd Has Two Divisions: the Cologne Division and the Bottle