Delta company sells bells to customers for $1 each. the variable cost to manufacture the bells is 10 cents. if the rattle department, a division of the delta company, wants to use the bells in its new line of rattles, which of the following transfer prices can be used if there is excess capacity?

a. $0.00
b. $0.05
c. $0.11
d. $0.95
e. $1.50
f. $2.00

C. $0.11

Explanation:

When there is excess capacity and there are no incremental fixed costs the break even transfer price would be the marginal cost of production. This is the least transfer price the Bells can sell to Rattle without making a loss. The most likely transfer price then would be $0.11 which allows the bells to cover their costs and also make 1 cent in profits. Option A, B and D would all be making losses where as Option E and F are two steep a price and may be unprofitable for rattle.

Hope that helps.

a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.