The Production Department of Ollie Corp. has produced and sold 27,840 yards of fabric to local craft stores. The Sewing Department of Ollie Corp. would like to manufacture 12,300 scarves and needs fabric. Each scarf will require 1 yard of fabric and the Sewing Department has asked the Production Department for a quote. The Production Department's Sales were $35,360, with Variable Costs of $11,300, Fixed Costs of $16,540, and production capacity of 60,000 yards of fabric. The negotiated sales price from the Production Department is the absorption cost. What should the sales price per unit for the Sewing Department be if they would like to have an Operating Income of $13,502?
A) $0.10 per yard
B) $1.51 per yard
C) $2.10 per yard
D) $2.91 per yard

Question

Quizplus · Accepted Answer

This question requires calculating the minimum acceptable transfer price and then using the formula for Operating Income to be able to calculate desired sales and the per yard cost. The negotiated sales price will be the absorption cost which will be equal to the variable cost per yard plus the fixed cost per yard. Calculate the absorption cost per yard as: ($11,300 + $16,540)/27,840 yards = $27,840/27,840 = $1.00 per yard. Now, calculate the desired sales. Sales - Cost (cost to acquire from assembly) = $13,502 Sales - ($1.00 × 12,300 yards) = $13,502. Sales - $12,300 = $13,502. Sales = $25,802. Lastly, divide this by the number of yards sold = $25,802/12,300 yards = $2.10 per yard (Choice C).