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USA Company's Box Division: Transfer Pricing at Full Capacity

The USA Company's Box Division produces cardboard boxes used for packaging microwavable fast foods. The Consumer Products Division produces a variety of fast-food entrees that are packaged in boxes. In the past the Consumer Products Division has purchased its boxes from the Box Division for .15 each. The Box Division currently is producing at capacity and sells 6,000,000 of these boxes each year at a price of .15. The Consumer Products Division has offered to buy 500,000 boxes per year from the Box Division at an internal transfer price of .13 per box. The Box Division's cost to produce each box consists of 0.09 of variable costs and 0.04 of fixed costs.

A. What is the minimum transfer price that would be acceptable to the Box Division?
B. Assume that by selling the boxed internally, the Box Division would avoid 0.03 of variable costs. Should the internal transfer be accepted at 0.13 per box? Explain.

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ANSWERS

Question A
The minimum transfer price is 0.09 which is the box's total ...

Solution Summary

This solution identifies the minimum transfer prices and provides recommendations if an internal transfer price of 0.13 per box should be accepted and why.

$2.19