Question 4 The Can Division of Fruit Products Inc manufactur

Question 4 The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? O $0.58 s0.34 O $0.66 O $0.28

Solution

Answer $0.58

Explanation

The minimum transfer price is equal to the variable cost plus opportunity cost.

The opportunity cost is equal to contribution margin on goods sold to external parties.

Sales Price $0.60

Variable Cost $ 0.24

Contribution Margin $ 0.36

Minimum transfer price = variable Cost + Opportunity cost - Cost saving if sold internally

= 0.24 +0.36-0.02

= 0.58