Assume the Thread Division has excess capacity. The Garment Division wants the Thread Division to furnish them additional spools of thread that could be made using the excess capacity. In a negotiated transfer price, the Thread Division should accept as a minimum any transfer price that exceeds the
A) total cost of producing spools for outside sales.
B) variable costs of producing the additional spools for the Garment Division.
C) contribution margin and outside spool sales.
D) foregone contribution margin on outside spool sales.

Question

Quizplus · Accepted Answer

The minimum transfer price that the Thread Division should accept is any price that exceeds the variable costs of producing the additional spools for the Garment Division. This is because, with excess capacity, the fixed costs are already covered, and accepting a price above variable costs contributes to covering fixed costs and potentially generating profit.

Assume the Thread Division Has Excess Capacity