The Post Division of the M.T. Woodhead Company produces basic posts that can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year, the Lamp Division bought all of its 25,000 posts from the Post Division at $1.50 each. The following data are available for last year's activities of the Post Division:

The total fixed costs would be the same for all the alternatives considered below.
-Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers.What is the lowest transfer price that would not reduce the operating income of the Post Division?
A) $0.90.
B) $1.35.
C) $1.41.
D) $1.75.

Question

The Post Division of the M.T. Woodhead Company produces basic posts that can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year, the Lamp Division bought all of its 25,000 posts from the Post Division at $1.50 each. The following data are available for last year's activities of the Post Division:

The total fixed costs would be the same for all the alternatives considered below.
-Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers.What is the lowest transfer price that would not reduce the operating income of the Post Division?
A) $0.90. 
B) $1.35. 
C) $1.41. 
D) $1.75.

Quizplus · Accepted Answer

The lowest transfer price that would not reduce the operating income of the Post Division is the variable cost per unit, which is $0.90. This ensures that the Post Division covers its variable costs when transferring posts internally.