The Parts Division of Nydron Corporation makes Part Y6P, which it sells to outside companies for $17.00 per unit. According to the cost accounting system, the costs of making one unit of Part Y6P consist of $7.00 for direct materials, $3.00 for direct labor, $4.50 for variable manufacturing overhead, and $1.20 for fixed manufacturing overhead. The Parts Division has enough idle capacity to make 1,000 units of Part Y6P each month. The Assembly Division of Nydron Corporation can use Part Y6P in one of its products. At present, the Assembly Division is purchasing an equivalent part from an outside supplier for $16.85 per unit. The Assembly Division needs 2,000 units of the part each month. It has been suggested that the Assembly Division buy Part Y6P from the Parts Division instead of buying the equivalent part from the outside supplier. The transfer price for this transaction would lie within what limits?
A) equal to or greater than $15.75 and less than or equal to $16.85
B) equal to or greater than $15.70 and less than or equal to $17.00
C) equal to or greater than $14.50 and less than or equal to $17.00
D) equal to or greater than $14.50 and less than or equal to $16.85

Question

Quizplus · Accepted Answer

The transfer price should be equal to or greater than the Parts Division's variable cost of producing Part Y6P, which is $15.75 ($7.00 + $3.00 + $4.50 + $1.20). The transfer price should also be less than or equal to the Assembly Division's current cost of purchasing the equivalent part from the outside supplier, which is $16.85.

The Parts Division of Nydron Corporation Makes Part Y6P, Which