The Table and Chair Divisions are part of the same company.Currently the Chair Division buys a part from Table for $384.The Table Division wants to increase the price of the part it sells to Chair by $96 to $480.The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero.Chair can buy the part from an outside supplier for $448.The cost data for the Table Division is as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 136 \
\text { Direct labor } & 200 \
\text { Variable overhead } & 40 \
\text { Fixed overhead } & 42
\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one?third of the fixed manufacturing overhead.The Table Division has excess capacity but no alternative uses for its facilities._____ is the minimum transfer price that should be charged.
A)$480
B)$448
C)$390
D)$376

Question

The Table and Chair Divisions are part of the same company.Currently the Chair Division buys a part from Table for $384.The Table Division wants to increase the price of the part it sells to Chair by $96 to $480.The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero.Chair can buy the part from an outside supplier for $448.The cost data for the Table Division is as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 136 \
\text { Direct labor } & 200 \
\text { Variable overhead } & 40 \
\text { Fixed overhead } & 42
\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one?third of the fixed manufacturing overhead.The Table Division has excess capacity but no alternative uses for its facilities._____ is the minimum transfer price that should be charged.
A)$480
B)$448
C)$390
D)$376

Quizplus · Accepted Answer

The minimum transfer price should cover the variable costs and any avoidable fixed costs. The variable costs are $136 (materials) + $200 (labor) + $40 (variable overhead) = $376. The avoidable fixed overhead is one-third of $42, which is $14. Therefore, the minimum transfer price is $376 + $14 = $390.

The Table and Chair Divisions Are Part of the Same