Homework Answers
a)Alabama Division is operating full capacity
So opportunity Cost = $15
Unit variable cost = $24
The minimum transafer price that the Alabama Division would be willing to accept is:
So, minimum transfer price = Unit variable cost + Opportunity Cost
= $24 + $15
= $39
So minimum transfer price of Alabama Division is $39
b)Alabama Division is operating with excess capacity
So opportunity cost = $0
Unit varariable cost = $24
The minimum transfer price of Alabama Division = Unit variable Cost + Opportunity Cost
= $24 + $0
= $24
So minimum transfer price of Alabama Division is $24
c) If Alabama Division saves the $3 variable shipping and packaging cost and Alabama Division is operating full capacity
So opporunity Cost = $15
New unit variable cost = $24 - $3 = $21
The minimum transfer price of Alabama Division = Unit Variable Cost + Opportunity Cost
= $21 + $15
= $36
The miniumum transfer price of Alabam Division is $36
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