The Mixed Nuts Division of Yummy Snacks,Inc.had the following operating results last year: Yummy expects identical operating results in the division this year.The Mixed Nuts Division has the ability to produce and sell 200,000 pounds of product annually.Assume that the Trail Mix Division of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.Mixed Nuts will be able to increase its profit by accepting any transfer price above:
A)$0.25 per pound
B)$0.08 per pound
C)$0.15 per pound
D)$0.30 per pound
E)$0.10 per pound

Question

The Mixed Nuts Division of Yummy Snacks,Inc.had the following operating results last year:  Yummy expects identical operating results in the division this year.The Mixed Nuts Division has the ability to produce and sell 200,000 pounds of product annually.Assume that the Trail Mix Division of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.Mixed Nuts will be able to increase its profit by accepting any transfer price above:
A)$0.25 per pound 
B)$0.08 per pound 
C)$0.15 per pound 
D)$0.30 per pound 
E)$0.10 per pound

Quizplus · Accepted Answer

To determine the minimum transfer price that the Mixed Nuts Division should accept, we need to calculate the incremental profit from producing and selling an additional 20,000 pounds of nuts.

Incremental profit = Contribution margin per pound x Additional pounds sold

From the table provided, we can see that the contribution margin per pound is $0.50. Therefore:

Incremental profit = $0.50 x 20,000 = $10,000

This means that the Mixed Nuts Division should accept a transfer price that is at least equal to $10,000/20,000 pounds = $0.50 per pound.

Out of the given options, only choice D of $0.30 per pound is above this minimum transfer price. Therefore, the best choice is D.