Sweater Division manufactures sweaters. The buttons used in production are purch

Question

Sweater Division manufactures sweaters. The buttons used in production are purchased from an outside supplier at a cost of $4.50 per sweater. The buttons can also be purchased in house from Supply Division for $4.00 per sweater. The cost data for the buttons produced by Supply Division are as follows:

Direct material $1.30
Direct labor 0.90
Variable indirect production 0.35
Fixed indirect production 0.30
Variable selling expenses 0.50
Fixed selling expenses 0.45

Variable selling expenses are not incurred on inside transfers. Assume Supply Division has excess capacity.

Required:
A) What is the minimum transfer price that Supply Division should charge Sweater Division for the transferred buttons?
B) What is the maximum transfer price that Sweater Division should pay Supply Division for the transferred buttons?

Explanation / Answer

Minimum transfer price is the variable cost of the transferring division 1.30+.90+.35= $2.55. Maximum is the outside purchase price which is $4.50.

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