Question

Tiffany Company has two divisions, Gold and Silver Gold produces a unit that Silver could use in its production. Silver currently is purchasing 50.800 units from an outside supplier for $33. Gold is operating at less than full capacity and has variable costs of $21.50 per unit. The full cost to manufacture the unit is $28. Gold currently sells 450,800 units at a selling price of $35. If an internal transfer is made, variable shipping and administrative costs of $2.50 per unit could be avoided. How much will Silver save by not purchasing from outside if a transfer price of $30.50 is agreed upon? Multiple Choice O $177,000 O $227,000 oooo O 5252.000 5127,000

Answer 1

Outside supplier price = $33 per unit

Number of units to be bought = 50,800

Transfer price = $30.5 per unit

Savings per unit of Silver division if units are bought from the Gold division = Outside supplier price - Transfer price

= 33 - 30.5

= $2.5

Total Savings of Silver division if units are bought from the Gold division = Savings per unit x Number of units to be bought

= 2.5 x 50,800

= $127,000

Fourth option is correct

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