The Florida Division of McKenna Company makes and sells batteries that can eithe
ID: 2531277 • Letter: T
Question
The Florida Division of McKenna Company makes and sells batteries that can either be sold to outside customers or transferred to the Alabama Division of McKenna Company. The following data are available from last month:
Florida Division:
Selling price per battery to outside customers $50
Variable cost per battery when sold to outside customers $35
Capacity in batteries 15,000
Alabama Division:
Number of batteries needed per month 5,000
Price per battery paid to an outside supplier $47
If Florida Division sells the batteries to Alabama Division, Florida Division can avoid $2 per battery in sales commissions.
Suppose that Florida Division sells 11,500 batteries each month to outside customers. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?
A. $47.00
B. $43.50
C. $37.50
D. $34.73
E. Some other amount.
Explanation / Answer
Solution: 37.50
Working:
From the perspective of the selling division, profits would rise as a result of the transfer when the Transfer price > Variable cost per unit + Opportunity cost per unit, thus equal 35 + 2.5 = 37.50
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