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

Because the Mixed Nuts Division has ample excess capacity and consequently there is no opportunity cost, the profit of the division would be increased by any transfer price in excess of its variable cost of $0.30 per pound (= $42,000/140,000 pounds).