Cambridge Products manufactures and sells cat toys and cat beds.The Bed Division incurs the following costs for the production of a single cat bed when 5,000 beds are produced each year.
$\begin{array}{lr}
\text { Direct materials } & \$ 8.00 \
\text { Direct labor } & 5.50 \
\text { Variable overhead } & 2.50 \
\text { Fixed overhead } & 2.00 \
\text { Total cost } & \$ 18.00 \
\end{array}$
The company sells cat beds to various pet stores for $26.00.The Toy Division is doing a promotion whereby each customer that purchases ten cat toys during the months of January,February,and March will receive a free cat bed.The Toy Division would like to purchase these beds from the Bed Division.
Assuming the Bed Division is at full capacity,what is the optimal transfer price?
A)$ 26.00
B)$13.50
C)$16.00
D)$18.00
E)None of the answer choices is correct.

Question

Cambridge Products manufactures and sells cat toys and cat beds.The Bed Division incurs the following costs for the production of a single cat bed when 5,000 beds are produced each year.
$\begin{array}{lr}
\text { Direct materials } & \$ 8.00 \
\text { Direct labor } & 5.50 \
\text { Variable overhead } & 2.50 \
\text { Fixed overhead } & 2.00 \
\text { Total cost } & \$ 18.00 \
\end{array}$  
The company sells cat beds to various pet stores for $26.00.The Toy Division is doing a promotion whereby each customer that purchases ten cat toys during the months of January,February,and March will receive a free cat bed.The Toy Division would like to purchase these beds from the Bed Division.
Assuming the Bed Division is at full capacity,what is the optimal transfer price?
A)$ 26.00
B)$13.50
C)$16.00
D)$18.00
E)None of the answer choices is correct.

Quizplus · Accepted Answer

When the Bed Division is at full capacity, the optimal transfer price is the market price of $26.00. This is because the Bed Division would be foregoing sales at the market price to transfer goods internally, so the transfer price should reflect the opportunity cost of not selling externally.

Cambridge Products Manufactures and Sells Cat Toys and Cat Beds