Question

Frocks and Gowns, Inc., has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $730,000 and produces (and sells) 104,000 units of Collars at a market price of $12.00 per unit. Variable costs total $5.10 per unit, and fixed charges are $4.40 per unit (based on a capacity of 124,000 units). The Night Wear Division wants to purchase 23,000 units of Collars from The Day Wear Division. However, the Night Wear Division is only willing to pay $8.55 per unit. What is the minimum transfer price for the 23,000 unit order that the Day Wear Division would accept if it wishes to maintain its pre-order contribution? $5.10. 0 $4.40 $6.00 $7.60

Answer 1

$6.00
Idle capacity	20,000
(124,000 - 104,000)
Transfer price of 20,000 units	$5.10
Transfer price of 3,000 units	$12.00
$5.10 (outlay costs) + $6.90 (opportunity cost)
Transfer price to maintain contribution margin	$6.00
[(20,000 x $5.10) + (3,000 x $12.00)]/23,000 units