Question

Pearson Inc. produces and sells a variety of household cleaning supplies and equipment including vacuum cleaners and carpet cleaner both of which are sold separately in stores. The carpet cleaning division incurs the following costs for the production of a single bottle of carpet cleaner when 600,000 bottles are produced each year:

Direct materials	$1.30
Direct labor	.50
Variable overhead	.25
Fixed overhead	.30
Total cost	$2.35

The company sells the bottles directly to its customers at a discounted price of $5.00 per bottle. The vacuum division is doing a promotion whereby each customer that purchases a vacuum cleaner during the month of May 2020 receives a free bottle of carpet cleaner. The vacuum division would like to purchase these bottles from the carpet cleaning division or it will have to purchase the carpet cleaner at a local retail store for $6.00 per bottle.

   37.        Refer to the Pearson Inc. information above. Assuming the carpet cleaning division has excess capacity, the minimum transfer price that should be charged is:

a.	$2.05
b.	$2.35
c.	$5.00
d.	$2.65

   38.   Refer to the Pearson Inc. information above. Assuming the carpet cleaning division is at full capacity, the minimum transfer price that should be charged is:

a.	$2.05
b.	$2.35
c.	$5.00
d.	$2.65

39.      Refer to the Pearson Inc. information above. Regardless of the carpet cleaning division’s capacity, the maximum transfer price that the vacuum division would pay is:

a.	$3.50
b.	$7.50
c.	$3.00
d.	$6.00

Answer 1

37.

Answer :- $2.05 Per Unit

Reason :- Due to spare capacity in Carpet Cleaning division, minimum transfer pricing should be Variable cost only i.e.

Direct Material	$1.30
Direct Labor	0.50
Variable Overhead	0.25
Total Variable Cost	$2.05

38.

Answer :- $5.00

Reason :- Due to full capacity in Carpet Cleaning division, minimum transfer pricing should be Variable Cost Plus Contribution lost

Direct Material	$1.30
Direct Labor	0.50
Variable Overhead	0.25
Total Variable Cost	$2.05
Sale Price	5.00
Contribution Lost	$2.95

39.

Answer :- $6.00

Reason :- The maximum transfer price that the vacuum division would pay is $6.00, since at this raw material is available in external market.