The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per... Question: The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for {eq}\$0.60 {/eq} per can. Its unit variable costs and unit fixed costs are {eq}\$0.24 {/eq} and {eq}\$0.08 {/eq}, respectively. The packaging division wants to purchase 50,000 cans at {eq}\$0.32 {/eq} a can. Selling internally will save {eq}\$0.02 {/eq} a can. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept?

A) {eq}\$0.24 {/eq}. B) {eq}\$0.32 {/eq}.

C) {eq}\$0.22 {/eq}. D) {eq}\$0.30 {/eq}.

Transfer Price:

Transfer price is the price at which one department of a company transfers its goods or services to another department of the same company. The transfer price should be such that it does not result in loss to the transferor department.

The correct option is (C) $0.22 The Can division will recover its fixed costs from its normal capacity. So, it will not include fixed costs in the transfer price. The transfer price would be the effective variable cost of the can division. {eq}\text{Transfer Price} = \text{Variable Cost per unit} - \text{Savings in cost per unit}\\ \text{Transfer Price} = \$0.24 - \$0.02\\ \text{Transfer Price} = \$0.22 {/eq}

Negotiated Transfer Pricing: Definition & Examples

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Chapter 10 / Lesson 6
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Negotiated transfer pricing is where company representatives negotiate prices themselves, not basing purely on market prices. Learn several advantages and disadvantages to using negotiated transfer pricing demonstrated through two companies' negotiations.