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Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division's variable cost per unit is $35 and its fixed cost per unit is $10.
-If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept?
A) $30
B) $35
C) $45
D) $70

Question

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Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division's variable cost per unit is $35 and its fixed cost per unit is $10.
-If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept?
A) $30
B) $35
C) $45
D) $70

Quizplus · Accepted Answer

The minimum transfer price should cover the marginal cost of producing the product plus the opportunity cost of not selling the product externally. Since the Food Division is operating at full capacity, the opportunity cost is the external sales price of $70. Therefore, the minimum transfer price is $70.

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