The Fruit Drink Company makes internal transfers at 180% of full cost.The Soda Refining Division purchases 30 000 containers of carbonated water per day,on average,from a local supplier who delivers the water for $30 per container via an external shipper.To reduce costs,the company located an independent supplier in Tasmania who is willing to sell 30 000 containers at $20 each,delivered to The Fruit Drink Company's Shipping Division in Tasmania.The company's Shipping Division in Tasmania has excess capacity and can ship the 30 000 containers at a variable cost of $2.50 per container.What is the total cost to The Fruit Drink Company if the carbonated water is purchased from the local supplier?
A)$900 000
B)$1 501 000
C)$1 200 000
D)$1 620 000

Question

Quizplus · Accepted Answer

To calculate the cost of purchasing from the local supplier:
$30 x 30,000 = $900,000 (external cost)

To calculate the cost of purchasing from Tasmania:
$20 x 30,000 = $600,000 (external cost)
$2.50 x 30,000 = $75,000 (internal shipping cost)
Total cost = $675,000 (internal cost)

Since the Fruit Drink Company makes internal transfers at 180% of full cost, the cost of internal transfer is:
180% x $675,000 = $1,215,000

Comparing the two options, it is cheaper to purchase from the local supplier. Therefore, the best choice is A) $900 000.

The Fruit Drink Company Makes Internal Transfers at 180% of Full