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Minimum transfer price to second division

8. The main division of Manchester Production has capacity to produce 140,000 units of its electronics components, while production has been at 105,000 per year for the past number of years.

Selected information from the most current income statement follow:

Sales 105,000 @ $30.00 $3,150,000
Variable manufacturing costs 1,837,500
Fixed manufacturing costs 850,000
Variable selling costs 493,500
Fixed administration costs 400,000
Operating Income $ 431,000

Selling costs would not be incurred on any internal sales or transfers

A second division of Manchester Production is considering the manufacture of a newproduct that could use the component produced by Manchester. This new product would sell for $42.00 per unit, incur per unit variable manufacturing costs (excluding the cost of component) of $14.00 and additional fixed costs of $440,000 annually. The second division anticipates that 65,000 units per year of this new product could be sold each year. This component could be purchased by the second division from an external supplier at a cost of $26.50, although if purchased all 65,000 units would have to be purchased from this supplier.

Which of the following represents the minimum transfer price that Manchester
main could provide to the second division?

a. $17.50
b. $21.10
c. $22.20
d. $25.30
e. $25.80

Solution Preview

The total units required are 65,000. The unused capacity is 35,000. For 65,000 units, 30,000 units would have to from the existing sales.

For unused capacity, only ...

Solution Summary

The solution explains how to calculate the minimum transfer price to second division