Chipper Division of Acme Corp.sells 80,000 units of part Z-25 to the outside market.Part Z-25 sells for $40,has a variable cost of $22,and a fixed cost per unit of $10.Chipper has a capacity to produce 100,000 units per period.Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.Jones has been approached by an outside supplier willing to supply the parts for $36.If Acme uses a negotiated transfer pricing system,what is the minimum transfer price that should be charged for this transaction?
A)$40.
B)$36.
C)$32.
D)$22.

Question

Quizplus · Accepted Answer

The minimum transfer price should cover the variable cost, which is $22, since Chipper has excess capacity and fixed costs are not relevant for the decision.