Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $35, $20 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $50. The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (20,000 hinges) at a cost of $45. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first. What is the minimum transfer price from the Hinge Division to the Door Division?

$20.

$35.

$45.

$50.

Answer 1

Correct answer----$20

Explanation

The minimum transfer from one department to other department is the variable cost of production and any opportunity cost.

Opportunity cost maybe loss occurred due to transferring goods to other department at lower cost and giving up some sales to outside customers.

Although in the question above there is no loss of contribution on outside sales which is indicated by the fact that the Hinges department has been working at below capacity.

The minimum transfer price will be $20 which is the variable cost of production.

The company will be in overall loss if Door department purchase hinges from outside supplier.