Answer:
The correct answer for option (a) is $2.6 and for option (b) is $7.19.
Explanation:
According to the scenario, the given data are as follows:
(a). If fastener division is not operating at full capacity,
then, opportunity cost = $0
Here, variable cost = $3.01
Fastener could avoid $0.41.
Then Variable cost = $3.01 - $0.41 = $2.6
So, we can calculate the minimum transfer price by using following formula:
Minimum transfer price = Variable cost + Opportunity cost
= $2.6 + $0
= $2.6
(b). If fastener division is operating at full capacity,
then, opportunity cost = $7.60 - $3.01 = $4.59
Here, variable cost = $3.01
Fastener could avoid $0.41.
Then Variable cost = $3.01 - $0.41 = $2.6
So, we can calculate the minimum transfer price by using following formula:
Minimum transfer price = Variable cost + Opportunity cost
= $2.6 + $4.59
= $7.19
