Signature Scents Has Two Divisions: the Cologne Division and the Bottle

question 72

Multiple Choice

Signature Scents has two divisions: the Cologne Division and the Bottle Division. The Bottle Division produces containers that can be used by the Cologne Division. The Bottle Division's variable manufacturing cost is $2, shipping cost is $0.10, and the external sales price is $3. No shipping costs are incurred on sales to the Cologne Division, and the Cologne Division can purchase similar containers in the external market for $2.60.
Assume the Bottle Division has no excess capacity and could sell everything it produced externally. Using the general rule, the transfer price from the Bottle Division to the Cologne Division would be:

• A) $2.00.
• B) $2.10.
• C) $2.60.
• D) $2.90.
• E) $3.00.

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Definitions:

Efficiency

The optimal allocation of resources to maximize the production of goods and services.

Total Surplus

The total net gain to society from creating and using goods and services, shown by adding together consumer and producer surplus.

Total Surplus

The sum of consumer and producer surplus, representing the total net benefit to society from the production and consumption of a good or service.

Gains From Trade

Gains achieved by dividing tasks and trading; in this way people can get more of what they want through trade than they could if they tried to be self-sufficient.