The Can Division of Bonita Industries manufactures and sells

The Can Division of Bonita Industries manufactures and sells tin cans externally for $1.20 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.10, respectively. The Packaging Division wants to purchase 50,000 cans at $0.34 a can. Selling internally will save $0.03 a can.

Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?

Solution

ANSWER = Minimum transfer price = $0.21 per can

Can Division

Sells externally for = $1.20 per can

Variable cost = $0.24

Fixed cost = $ 0.10

Savings if can sold internally = $0.03

Can Division has sufficient capacity, therefore the minimum transfer price is equal to the variable cost less benefit due to acceptance

= $ 0.24 - 0.03

= $ 0.21

* Fixed cost will continue to be incurr and does not affect the transfer price