Spice Company has two divisions,Parsley and Sage.Parsley produces a unit that Sage could use in its production.Sage currently is purchasing 50,000 units from an outside supplier for $50.Parsley is operating at less than full capacity and has variable costs of $27 per unit.The full cost to manufacture the unit is $38.Parsley currently sells 450,000 units at a selling price of $54.If an internal transfer is made,variable shipping and administrative costs of $2 per unit could be avoided.What would be the maximum transfer price?
A)$25
B)$27
C)$38
D)$50

Question

Quizplus · Accepted Answer

The maximum transfer price is the lower of the cost Sage would incur to purchase externally ($50) or the opportunity cost to Parsley. Since Parsley's full cost is $38 but it can sell externally for $54, selling internally would mean losing potential revenue. However, since Sage is currently paying $50 externally, this is the highest price it would be willing to pay internally, making $50 the maximum transfer price.

Spice Company Has Two Divisions,Parsley and Sage