Use the following information for questions 103 and 104.
The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can.
-Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?
A) $0.24
B) $0.32
C) $0.22
D) $0.30

Question

Quizplus · Accepted Answer

The Can Division's unit variable cost is $0.24 and unit fixed cost is $0.08, so its total cost per can is $0.32. The Packaging Division wants to purchase 50,000 cans at $0.32 per can, which means the Can Division will break even on this order. However, if the Can Division sells internally, it will save $0.02 per can, bringing its cost down to $0.30 per can. Therefore, the Can Division should not accept anything less than $0.30 per can as the transfer price, as that is the minimum amount that will allow it to at least break even on this order. Since $0.30 per can is lower than the Packaging Division's offer of $0.32 per can, the Can Division should sell internally.

Use the Following Information for Questions 103 and 104