Question
In: Accounting
Markey Corporation consists of two divisions, North and South. The North makes Glop, a product that...
Markey Corporation consists of two divisions, North and South. The North makes Glop, a product that can be used in the production of the product that the South division makes and sells. Both divisions are considered profit centers. The following data are available concerning Glop and the two divisions:
| North | South | |
|---|---|---|
| Average units produced | 150,000 | |
| Average units sold | 150,000 | |
| Variable manufacturing cost per unit | $2 | |
| Variable finishing cost per unit | $5 | |
| Fixed divisional costs | $75,000 | $125,000 |
The North Division can sell all of its output outside the company for $4 per unit. The South Division can buy the Glop from other firms for $4. The South Division sells its product for $12.What is the optimal transfer price in this case?
Select one:
a. $9 per unit
b. $4 per unit
c. $7 per unit
d. $2 per unit
Solutions
Expert Solution
| Calculation of Optimal transfer price:- | ||
| The North Division can sell all of its output outside the company for $4 per unit and north division is profit center. So in order to transfer its output to South Division, North Division has to sacrifice its outside sale. So the optimal transfer price in this case would be as follows:- | ||
| Transfer price | = | Variable cost + Contribution Margin to be lost |
| Selling Price per unit | $ 4.00 | |
| Less: Variable cost per unit | $ 2.00 | |
| Contribution Margin to be lost | $ 2.00 | |
| Variable Cost per unit to be incurred | $ 2.00 | |
| Contribution Margin to be lost | $ 2.00 | |
| Optimal Transfer price | $ 4.00 | |
| So, Option b. $4 per unit is correct. | ||
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