Question

15. Vaughn Manufacturing manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 18000 units to the Production Division at 1050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2050 and unit variable costs and fixed costs of $1050 and $1000, respectively. The Production Division is currently paying $1900 per unit to an outside supplier. $100 per unit can be saved on internal sales from reduced selling expenses.

What is the minimum transfer price that the Engine Division should accept?

$1950

$2050

$1000

$1900

18. The Wood Division of Waterway Industries manufactures rubber moldings and sells them externally for $50. Its variable cost is $25 per unit, and its fixed cost per unit is $5. Waterway’s president wants the Wood Division to transfer 4300 units to another company division at a price of $23.

Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept is

$50.

$25.

$5.

$23.

Please Answer Both Questions. Thank you!

Answer 1

Answer to 15:

The correct answer is "$1,950".

Reason: The engine division is currently operating at capacity. Hence in order to sell 18,000 units to the production division, it will have to reduce its external sales by 18,000 units. Hence minimum transfer price is calculated as below:

a) Price offered by external customers = $2,050

b) Saving in cost = $100

c) Minimum transfer price = $2,050 - $100 = $1,950

Answer to 18:

The correct answer is "$50".

Reason: Since it is given in the question that the wood division does not have any available capacity, hence the minimum transfer price it should accept is $50 which is the price it will get by selling in the external market.