The Mixed Nuts Division of Yummy Snacks,Inc.had the following operating results last year: Yummy expects identical operating results in the division this year.The Mixed Nuts Division has the ability to produce and sell 200,000 pounds of product annually.Assume that the Trail Mix Division of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.Mixed Nuts will be able to increase its profit by accepting any transfer price above:
A)$0.25 per pound
B)$0.08 per pound
C)$0.15 per pound
D)$0.30 per pound
E)$0.10 per pound

Question

The Mixed Nuts Division of Yummy Snacks,Inc.had the following operating results last year:  Yummy expects identical operating results in the division this year.The Mixed Nuts Division has the ability to produce and sell 200,000 pounds of product annually.Assume that the Trail Mix Division of Yummy wants to purchase an additional 20,000 pounds of nuts from the Mixed Nuts Division.Mixed Nuts will be able to increase its profit by accepting any transfer price above:
A)$0.25 per pound 
B)$0.08 per pound 
C)$0.15 per pound 
D)$0.30 per pound 
E)$0.10 per pound

Quizplus · Accepted Answer

To determine the minimum transfer price that the Mixed Nuts Division should accept, we need to calculate the contribution margin per pound of nuts. 
Contribution Margin = Sales Revenue - Variable Costs per unit
Contribution Margin = ($1.20 - $0.80) = $0.40 per pound

Therefore, the Mixed Nuts Division should accept any transfer price above its variable cost, which is $0.10. However, to increase its profits, it would need to accept a transfer price above its contribution margin per unit, which is $0.40.

Therefore, the Mixed Nuts Division should accept the Trail Mix Division's offer to purchase additional nuts only if the transfer price is above $0.40 per pound, which makes option D the best choice.