Avery Corporation has two divisions, A and B, which are both organized as profit

Question

Avery Corporation has two divisions, A and B, which are both organized as profit centers; Division A produces and sells widgets to Division B and to outside customers. Division A has total costs of $49, $27 of which are variable. Division A is operating significantly below capacity and sells the widgets for $71. Division B has received an offer from an outsider vendor to supply all the widgets it needs (20,000 widgets) at a cost of $66. The manager of Division B is considering the offer but wants to approach Division A first.

What is the minimum transfer price from Division A to Division B?

Explanation / Answer

Division A is operating significantly below capacity

Minimum Transfer Price per unit= Variable Cost per unit+ Opportunity Cost

Minimum Transfer Price per unit= $27+0

Minimum Transfer Price per unit= $27

Units required = 20000

Total Transfer Price= 20000*27= 540000

Note:

Opportunity cost is contribution lost which could be earned if goods sold to to outside customers.

Since A is operating significantly below capacity, hence Division A has excess capacity,there is no opportunity cost associated with the transfer.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.