Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, but the division incurs $1 additional shipping cost per unit when selling to external suppliers. The market price for the division's durian juice concentrate is $10 per unit, and currently, the external demand for Durian Division's durian juice concentrate is 5000 units.
Using the transfer pricing formula, Durian Division should charge the Juice Division:
A) $6.00.
B) $7.13.
C) $9.00.
D) $10.00.

Question

Quizplus · Accepted Answer

The transfer price should be equal to the variable cost of production plus the incremental shipping cost, which is $6 + $1 = $7.13.

Fruities Ltd Has Two Divisions, Durian Division and Juice Division