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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Use the following information for Multiple-Choice Questions 11–9 and 11–10:

Division A manufactures an aircraft engine component with unit variable product cost of $38 and market price of $50. Division A incurs shipping costs of $3 per unit for sales to outside parties only. Division B uses this component in the manufacture of its own engine production activities. Top management allows negotiated transfer pricing.

Refer to the information above. If Division A is operating at less than full capacity, the minimum transfer price (the floor of the bargaining range) is

  1. a. $38.
  2. b. $50.
  3. c. $44.
  4. d. $47.
  5. e. There is no bargaining range.

To determine

Identify minimum transfer price.

Explanation

Transfer Price:

The amount of price charged by the selling department for a component to the purchasing department of a similar company is known as transfer price.

a.

The transfer price which would leave the selling division no worse off if the product was sold to the internal division of a company rather than in the outside market is known as minimum transfer price. As Division A is not operating at its full capacity, the minimum transfer price will be $38. Division A will incur a loss if it sells the product below the amount of $38. Therefore, this option is correct...

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