Use the information below to answer the following question(s).The Burnaby Division of Columbia Ltd.produces and sells component parts.Its variable costs per unit are $80 for direct materials, $32 for direct labour and $18 for variable factory overhead.It currently can sell it components on the outside market at a price of $165/unit.Fixed overhead costs are $22 per unit based on a denominator volume of 180,000 units.
-The Surrey Division of Columbia Ltd.has approached the Burnaby Division and requested that it supply 25,000 units of the component at a transfer price of $150.The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division.Assuming Burnaby Division has no idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?
A)$165
B)$150
C)$162
D)$130
E)$127

Question

Quizplus · Accepted Answer

The minimum transfer price the Burnaby Division should agree to accept is $162. This is because the transfer price must cover the variable costs of production ($80 + $32 + $18 = $130) plus the fixed overhead costs ($22) that are allocated to the units produced for the Surrey Division. The savings in direct materials costs ($3 per unit) can be used to offset the fixed overhead costs, resulting in a minimum transfer price of $130 + $22 - $3 = $162.

Use the Information Below to Answer the Following Question(s)