Question

Manly Aromas operates with two divisions, Aftershave and Deodorant. The Aftershave Division produces a chemical that the Deodorant Division also uses. The Aftershave Division also sells this chemical to other firms for $10 per ounce. The cost information for the Aftershave Division is as follows.

Variable costs per ounce	$6.00
Fixed costs per ounce	$15.00
Monthly production capacity	30,000 ounces

If the Aftershave Division is operating at full capacity and can sell all of the chemical it can produce, what is the minimum transfer price that the Aftershave Division will accept?

Select one:

a. $3 per ounce

b. $6 per ounce

c. $10 per ounce

d. $15 per ounce

Answer 1

	If the Aftershave Division is operating at full capacity and can sell all of the chemical it can produce, what is the minimum transfer price that the Aftershave Division will accept?
	The Aftershave Division has no spare capacity. So in order to transfer units to Deodorant Division, Aftershave Division has to sacrifice its outside sale. So the lowest transfer price for units would be as follows:-
	Transfer price	=	Variable cost + Contribution Margin to be lost
	Selling Price per ounce		$                                                                                                  10.00
	Less: Variable cost per ounce		$                                                                                                    6.00
	Contribution Margin to be lost		$                                                                                                    4.00
	Variable Cost per unit to be incurred		$                                                                                                    6.00
	Contribution Margin to be lost		$                                                                                                    4.00
	Minimum Transfer price recommended		$ 10.00
	So, Option c. $10 per ounce is correct.

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