Part AR3 costs the Southwestern Division of Luxon Corporation $26 to make-direct materials are $10,direct labor is $4,variable manufacturing overhead is $9,and fixed manufacturing overhead is $3.Southwestern Division sells Part AR3 to other companies for $30.The Northeastern Division of Luxon Corporation can use Part AR3 in one of its products.The Southwestern Division has enough idle capacity to produce all of the units of Part AR3 that the Northeastern Division would require.What is the lowest transfer price at which the Southwestern Division should be willing to sell Part AR3 to the Northeastern Division?

A) $30
B) $26
C) $23
D) $27
E) $21

Question

Matayiah White · Accepted Answer

Final Answer : C, Explanation :  The lowest transfer price should be based on the variable cost of producing Part AR3 since the Southwestern Division has enough idle capacity to produce all the units required by the Northeastern Division. Therefore, the transfer price should cover only the variable cost of production, which is $10 for direct materials, $4 for direct labor and $9 for variable manufacturing overhead. Thus, the lowest transfer price would be $23 (=$10 + $4 + $9). Any price below this would result in a loss for the Southwestern Division. Therefore, the correct answer is (C) $23.

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