Question

The Lumber Division of Swifty Corporation produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity 110000 board feet Price per board foot $2.50 Variable production cost per bd. ft. $1.25 Variable selling cost per bd. ft. $0.50 Construction Division: Board feet needed 35000 Outside price paid per bd. ft. $2 If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If current outside sales are 40000 board feet, what is the minimum transfer price that the Lumber Division could accept? $2.50 $1.75 $1.40 $1.25

Answer 1

Here, Lumber division have excess capacity for fulfiling construction division demand (capacity 110,000-40,000 current sales = 70,000 excess capacity.) so sales to its regular customer wont be affected by selling to construction division.

So the minimum transfer price for lumber division = variable cost of production and selling to construction division.

	Per Bd ft
Variable cost of production	$1.25
Variable selling and admin expenses	$0.15	[$0.50-$0.35] 0.35 shipping cost would be saved so we will reduce it
Minimum price	$1.4[$1.25+$0.15]

Answer C) $1.40

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