The Can Division of Vaughn Manufacturing manufactures and sells tin cans externally for $1.20 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.10, respectively. The Packaging Division wants to purchase 50,000 cans at $0.34 a can. Selling internally will save $0.03 a can. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? $0.86 $0.71 $1.17 $0.27

Question

Business

Giselle Foster

25 July, 00:15

The Can Division of Vaughn Manufacturing manufactures and sells tin cans externally for $1.20 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.10, respectively. The Packaging Division wants to purchase 50,000 cans at $0.34 a can. Selling internally will save $0.03 a can. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? $0.86 $0.71 $1.17 $0.27

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Answers (1)

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Terrell Ellison · Answer 1

Minimum transfer price = $1.17

Explanation:

The Can Division is operating at full capacity, hence it has no excess capacity.

This implies that it can not produce enough to meet both the internal and external buyers.

Since Division X can not accommodate the demands of the Packaging Division at a price lower than the external price, because it will result to a loss in contribution.

To maximize and optimize the group profit

Minimum transfer price = External selling price - savings in internal transfer cost

= $1.20 - 0.03 = $1.17

Minimum transfer price = $1.17