The Red River Division of Alto Company produces and sells bags of pottery clay w

Question

The Red River Division of Alto Company produces and sells bags of pottery clay which can either be sold to outside customers or transferred to the White Mountain Division of Alto Company. The following data are available for the last year: Red River Division: Production capacity Selling price per bag to outside customer:s Variable production cost per bag Variable selling cost per bag 18,000 bags $20 per bag $10 per bag White Mountain Division: Number of bags needed annually Price per bag paid to an outside supplier 6,000 bags $16 per bag By selling to the White Mountain Division, the Red River Division will avoid $3 per bag in selling costs. If Red River can sell 15,000 bags annually to outside customers, what is the lowest acceptable transfer price from the viewpoint of the selling division A. $20 per bag B. $16 per bag C. $11 per bag D. $14 per bag

Explanation / Answer

completely sells out side

contribution margin = 18000*(20-10-4) = 108000

15000 sells out side

15000*(20 -10 - 4) = 90000

missing opportunity cost = 108000 - 90000 = 18000

per unit opportunity cost = (18000 - 3000*3) / 3000 = 3

transfer price = Opportunity cost + variable cost = 3 + (10+1) = 14 Option D

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