Management of a local catering company would like the Food Division to transfer
ID: 2551228 • Letter: M
Question
Management of a local catering company would like the Food Division to transfer 10,000 containers of its final product to the Restaurant Division for $29.00. The Food Division sells the product to customers for $74.00 per unit. The Food Division's variable cost per unit is $25.00 and its fixed cost per unit is $13.00. If the Food Division has 10,000 units of available capacity, what is the minimum transfer price the Food Division should accept?
$25.00
$42.00
$74.00
$29.00
$25.00
$42.00
$74.00
$29.00
Explanation / Answer
The minimum transfer price is 25$ should be accepted by the food division.minimum transfer price must be minimum and equal to variable cost only .However it can be greater than variable cost if division incurred some incrimental fixed cost. If company is not incurred any extra fixed cost then transfer price must be equal to variable cost. Normal fixed cost is not considered for transfer price within the division of company. According to general rule transfer price within the same company by one division to another division should be equal to only variable cost or marginal cost.So answer is 25 $ which is variable cost of food division.
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