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Answer :
Final answer:
In Starline Inc., the optimal transfer price for coffee grinders, from the Coffee Grinder Division to the Coffee Maker Division would be $36.00 which is the total manufacturing cost for each grinder.
Explanation:
The optimal transfer price from the Coffee Grinder Division to the Coffee Maker Division in this case would be $36.00. This is because, irrespective of where the coffee grinders are sold, internal or external, the Coffee Grinder Division incurs a total cost of $36.00 for each coffee grinder manufactured. Since the problem statement specifies that the Coffee Grinder Division has excess capacity and there would be no lost sales from selling internally, the variable cost as well as the fixed overhead cost would be covered at this transfer price. Hence, $36.00 becomes the minimum price at which the Coffee Grinder Division can sell the grinder without making a loss.
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The optimal transfer price that should be charged to the Coffee Maker Division is $22.50. Option B is correct.
The transfer price should be based on the variable cost incurred by the Coffee Grinder Division, as there is no lost sales by selling internally and the division has excess capacity. The variable cost per coffee grinder is the sum of direct materials, direct labor, and variable overhead, which amounts to:
- = $12.00 + $10.50 + $7.50
- = $30.00
However, since the Coffee Maker Division is offering the coffee grinders for free as part of a promotion, the transfer price should cover only the variable cost. Therefore, the optimal transfer price is $22.50, which is the variable cost per coffee grinder. Option B holds true.
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