Question

The Can Division of Crane Company manufactures and sells tin cans externally for $0.70 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.07, respectively. The Packaging Division wants to purchase 50,000 cans at $0.31 a can. Selling internally will save $0.01 a can.

Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept?

$0.69

$0.63

$0.32

$0.39

Answer 1

Answer:

$0.69

Explanation:

Given, the Can division of Cran Company is operating at full capacity.

This means that it can sell its whole products externally.Therefore, in case of internal sales, to remain indifferent, it must atleast make contribution from external sales.

Therefore, minimum transfer price can be calculated as follows:

Minimum Transfer Price = Variable cost (-) Internal savings in variable cost + Contribution from external sources

= 0.24 - 0.01 + 0.46

= $0.69

Notes:

Variable cost = $0.24

Savings in variable cost = $0.01

Contribution from external sources =

$0.70 - $0.24 = $0.46