ordan Products manufactures and sells sports apparel and sports accessories including water goggles. The accessory division incurs the following costs for the production of a pair of water goggles when 3,000 units are produced each year:
Direct materials
$ .40
Direct labor
.25
Variable overhead
1.00
Fixed overhead
.50
Total cost
$2.15
The goggles sell for a retail price of $8.00 per pair. The sports apparel division is doing a promotion whereby each customer that purchases a swimsuit during the month of May receives a free pair of goggles. The apparel division would like to purchase these goggles from the accessory division.
A. Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division has excess capacity and there would be no contribution margin lost on outside sales if they sell to the apparel division.
B. Calculate the minimum transfer price the accessory division should charge the apparel division if the accessory division does not have excess capacity and they do not wish to incur additional losses if they sell to the apparel division.