A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where the Production department could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operation are as follows: There is currently no external market for the Production department to sell its products, so all sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assuming that the Production department uses the minimum acceptable transfer price, how much total variable costs are they incurring per unit once the Wholesale department sells overall?
A) $0.08
B) $0.44
C) $0.78
D) $1.14

Question

A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where the Production department could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operation are as follows:  There is currently no external market for the Production department to sell its products, so all sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assuming that the Production department uses the minimum acceptable transfer price, how much total variable costs are they incurring per unit once the Wholesale department sells overall?
A) $0.08 
B) $0.44 
C) $0.78 
D) $1.14

Quizplus · Accepted Answer

This question requires familiarity with calculating results once you factor in that part of the sale and costs between two departments within the same organization. To calculate this, it is best to determine the per unit cost of each number that will be needed. The variable costs from the Production department are needed to calculate the overall variable cost per unit. $28,600/80,000 units = $0.36 per unit. To calculate the additional variable costs incurred by the Wholesale department, subtract the transfer price from the variable costs, and divide by units sold. ($62,479 - $56,000)/80,000 units = $6,479/80,000 units = $0.08 per unit. Total variable cost per unit would be: $0.36 + $0.08 = $0.44 (Choice B).

A Factory Has Several Business Units and Is Vertically Integrated