Question

USE THE FOLLOWING INFORMATION FOR THE NEXT 3 QUESTIONS

Pearson Inc. produces and sells a variety of household cleaning supplies and equipment including vacuum cleaners and carpet cleaner both of which are sold separately in stores. The carpet cleaning division incurs the following costs for the production of a single bottle of carpet cleaner when 600,000 bottles are produced each year:

Direct materials	$1.30
Direct labor	.50
Variable overhead	.25
Fixed overhead	.30
Total cost	$2.35

The company sells the bottles directly to its customers at a discounted price of $5.00 per bottle. The vacuum division is doing a promotion whereby each customer that purchases a vacuum cleaner during the month of May 2020 receives a free bottle of carpet cleaner. The vacuum division would like to purchase these bottles from the carpet cleaning division or it will have to purchase the carpet cleaner at a local retail store for $6.00 per bottle.

   37.        Refer to the Pearson Inc. information above. Assuming the carpet cleaning division has excess capacity, the minimum transfer price that should be charged is:

a.	$2.05
b.	$2.35
c.	$5.00
d.	$2.65

   38.   Refer to the Pearson Inc. information above. Assuming the carpet cleaning division is at full capacity, the minimumtransfer price that should be charged is:

a.	$2.05
b.	$2.35
c.	$5.00
d.	$2.65

39.      Refer to the Pearson Inc. information above. Regardless of the carpet cleaning division’s capacity, the maximum transfer price that the vacuum division would pay is:

a.	$3.50
b.	$7.50
c.	$3.00
d.	$6.00

Answer 1

37) When the division have the excess capacity it wil charge only the variable costs of product. Fixed costs will remain constant and they will not change with an increase in number of units. So they are not relevant in this case.

= direct material+labor+variable OH

=$1.30+$0.50+$0.25

=$2.05

Thus, Assuming the carpet cleaning division has excess capacity, the minimum transfer price that should be charged is: $2.05 Answer A)

38) when there is no excess capacity , the sales to normal customer has to be forgone. Thus, transfer price would be equal to sales price to regular customers. Any price below that would reduce profit of the division so they would not accept lesser price.

Answer = $5 Answer C)

39) VAccum division pays $6 to outside supplier. So he would pay maximum $6 to carpet cleaning division.

Any price beyond that would reduce vaccum divisions profit so it would not be acceptable.

Maximum price = $6 answer d)

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