Holiday corp has two divisions quail and marlin. quail produces a widget that marlin could use in its production. quails variable cost are $4 per widget while the fulls cost is $7. widgets sell on the open market for $12 each. A. if quail has excess capacity, what would be the cost savings for Holiday if the transfer was made and marlin currently is purchasing 100,000 units on the open market.
b. what would be the maximum transfer price?
c. if quail is operating at capacity, what would be the minimum transfer price?

a. $800,000

b. $12

c. $12

Explanation:

Cost Savings :

Market Price  ($12 × 100,000 units)                                    $1,200,000

Less Minimum Transfer Price ( $4 × 100,000 units)           ($400,000)

Savings                                                                                   $800,000

Maximum Transfer Price is $12

If quail is operating at capacity, units to meet internal demand would need to be recovered from the external market and that creates an opportunity cost :

Minimum transfer price = Variable Cost per unit - Internal Savings + Opportunity Cost per unit

                                       = $4 + ($12 - $4)

                                       = $4 + $8

                                       = $12