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frocks and gowns incorporated has two divisions day wear and night wear the day wear division has an investment base of 880,000 and produces and sells 134,500 units of collars at a market price of 12.20 wants to purchase 27,000 units of collars from the day wear division. what is the minimum transfer price that the day wear division would accept for the 27,000 unit order from the night wear

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Kolawole845

Question

Frocks and gowns incorporated has two divisions day wear and night wear the day wear division has an investment base of $880,000 and produces (and sells) 134,,500 units of Collars at a market price of $12.20 per unit. Variable costs total $7.80 per unit, and fixed charges are $3.90 per unit (based on a capacity of 140,000 units). The Night Wear Division wants to purchase 27,000 units of Collars from The Day Wear Division. However, the Night Wear Division is only willing to pay $8.45 per unit.

What is the contribution margin for the Day Wear Division without the transfer to the Night Wear Division?

Answer:

The minimum transfer value = $305,200

Explanation:

The company current has an excess capacity of 140,000-134,500=5,500 units

These available quantities can sold at a minimum transfer price of $7.80.

However, the balance of 21,500 (i.e 27,000 minus 5,500) should be transferred at the market price of $12.20. This is so because there is an opportunity cost attached to units supplied which is the contribution to be earned if sold at the market price.

Hence, The 27,000 units should transferred at the value computed below:

                                                             $

First 5,500= $5,500× $7.80=          42,900

The balance of 21,500 × $12.20=   262,300

The total value                                 305,200

The minimum transfer value = $305,200

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