Use the information below to answer the following question(s).The Burnaby Division of Columbia Ltd.produces and sells component parts.Its variable costs per unit are $80 for direct materials, $32 for direct labour and $18 for variable factory overhead.It currently can sell it components on the outside market at a price of $165/unit.Fixed overhead costs are $22 per unit based on a denominator volume of 180,000 units.
-The Surrey Division of Columbia Ltd.has approached the Burnaby Division and requested that it supply 25,000 units of the component.The Burnaby Division will save $3 per unit of direct materials costs for the components manufactured for the Surrey Division.Assuming Burnaby Division has idle capacity, what is the minimum transfer price the Burnaby Division should agree to accept?
A)$165
B)$150
C)$162
D)$130
E)$127

Question

Quizplus · Accepted Answer

The minimum transfer price should cover the variable costs and any savings. The variable costs are $80 (direct materials) + $32 (direct labour) + $18 (variable overhead) = $130. With a $3 saving on direct materials, the cost becomes $127.

Use the Information Below to Answer the Following Question(s)