Question

Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $230 per table, consisting of 85% variable costs and 15% fixed costs. The company has surplus capacity available. It is Back​ Forrest's policy to add 55% markup to full costs. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.​ Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit​ Dantley's Furniture should bid on this long- term order ?

Choices : A. $230

B. $196

C. $357

D. $161

Answer 1

The transfer price could be based on: (1) market price, (2) cost-based price, or (3) negotiated price. Market price is applicable if there is an existing market. Cost-based price, either using variable costing or absorption costing, applies a certain mark-up above production costs.

In order to promote the best interest of the selling and buying divisions (and the entire company), the transfer price is subject to upper and lower limits.

Upper limit = Selling price in the outside market (i.e., from an outside seller)

Lower limit = Variable cost per unit plus opportunity cost per unit

The opportunity cost refers to the lost contribution margin if the selling division has no excess capacity. If there is excess capacity, there would be no opportunity costs. Fixed costs are ignored because the same amount will be incurred regardless of the number of units produced.

So as per the above explanation

Lowest price per unit of dantley's furniture is Variable cost of production because it has surplus capacity

So minimum bid amount will be 230*85% = 195.5