Do It! Review 22-4 The fastener division of Southern Fasteners manufactures zipp

Question

Do It! Review 22-4 The fastener division of Southern Fasteners manufactures zippers and then sells them to customers for $7.94 per unit. Its variable cost is $3.41 per unit, and its fixed cost per unit is $1.05. Management would like the fastener division to transfer 11,700 of these zippers to another division within the company at a price of $3.41. The fastener division could avoid $0.19 per zipper of variable packaging costs by selling internally. Determine the minimum transfer price. Assuming the fastener division is not operating at full capacity. (Round answer to2 decimal places, e.g. 10.50.) Minimum transfer price Assuming the fastener division is operating at full capacity. (Round answer to 2 decimal places, e.g. 10.50.) Minimum transfer price s LINK TO TEXT

Explanation / Answer

Answer a.

Fastner division incurs variable cost of $3.41 when it sells zipper to outside customers. Selling price for the same is $7.94. Hence, earns contribution of $ 4.53 per unit of zipper.

However, if it sells zipper to another division of within the company, its varible cost is $ 3.22.

Assuming the fastner division is not operating at its full capacity i.e. even after meeting outside demand it has surplus capacity to produce more, the minimum transfer price will the variable cost incurred by Fastner division viz. $3.22 [ 3.41-0.19]

Answer b.

Assuming the fastner division is operating at full capacity, it will try to recover the contribution it earns on each unit of zipper that is sold to outside customers.

Hence, minimum transfer price = Variable Cost + Contribuiton Margin per unit = 3.22 + 4.53 = $7.75 per unit

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