Full Serve Inc.has a number of divisions.One division, Gamma, makes zippers that are used in the manufacture of boots.Another division, Delta, makes boots that use the zippers and needs 95,000 zippers per year.Gamma incurs the following costs for one zipper:

Full Serve has the capacity to make 960,000 zippers per year, but due to a soft market, it only plans to produce and sell 630,000 zippers next year.Delta currently buys zippers from an outside supplier for $4.00 each (the same price that Gamma receives).
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Assume that Full Serve allows negotiated transfer pricing.What is the floor of the bargaining range and which division sets it?
A) $3.50; Gamma
B) $2.70; Delta
C) $2.70; Gamma
D) $1.75; Delta
E) $1.44; Gamma

Question

Full Serve Inc.has a number of divisions.One division, Gamma, makes zippers that are used in the manufacture of boots.Another division, Delta, makes boots that use the zippers and needs 95,000 zippers per year.Gamma incurs the following costs for one zipper:
 
Full Serve has the capacity to make 960,000 zippers per year, but due to a soft market, it only plans to produce and sell 630,000 zippers next year.Delta currently buys zippers from an outside supplier for $4.00 each (the same price that Gamma receives).
- 
Assume that Full Serve allows negotiated transfer pricing.What is the floor of the bargaining range and which division sets it?
A) $3.50; Gamma 
B) $2.70; Delta 
C) $2.70; Gamma 
D) $1.75; Delta 
E) $1.44; Gamma

Quizplus · Accepted Answer

As the seller, Gamma sets the floor of the bargaining range.As Gamma has excess capacity, it must cover its incremental costs which are equal to variable manufacturing costs.Minimum transfer price = (Direct materials + Direct labor + Variable overhead) = ($0.25 + $0.22 + $0.97) = $1.44