Question

Full Serve Inc. has a number of divisions. One division, Gamma, makes zippers that are used in the manufacture of boots. Another division, Delta, makes boots that use the zippers and needs 95,000 zippers per year. Gamma incurs the following costs for one zipper: Direct materials Direct labor Variable overhead Fored overhead Total $0.25 0.22 0.97 1.40 $2.84 Full Serve has the capacity to make 960,000 zippers per year, but due to a soft market, it only plans to produce and sell 630,000 zippers next year. Delta currently buys zippers from an outside supplier for $4.00 each (the same price that Gamra receives). Assume that full serve allows negotiated transfer pricing. What is the floor of the bargaining range and which division sets it? Ca. $1.75; Delta b. $2.70; Gamma Cc. $2.70; Delta Cd. $3.50; Gamma Ce. $1.44; Gamma

Answer 1

Answer: [e] $1.44 Gamma.

Explanation:

As Gamma has excess capacity there is no opportunity cost in selling to Delta. Hence, the lowest price that Gamma can afford is the variable cost, which, is $1.44 (0.25+0.22+0.97).