Fruities Ltd Has Two Divisions, Durian Division and Juice Division

question 4

Multiple Choice

Fruities Ltd has two divisions, Durian Division and Juice Division. Durian Division has an annual capacity of 10 000 units of durian juice concentrate. Juice Division's annual requirement of durian juice concentrate is 8000 units. There is no external market for durian juice concentrate; however, the Durian Division can use its facilities to manufacturer prune paste, which is a very popular product with unlimited external demand, at $13 per unit. The variable production cost of one unit of durian juice concentrate at Durian Division is $6, and the variable production cost of one unit of prune paste is $8. Durian division also incurs $1 additional shipping cost per unit when selling prune paste to external suppliers.
Using the transfer pricing formula, what is the per unit opportunity cost of selling one unit of durian juice concentrate to Juice Division?

• A) $0
• B) $4
• C) $5
• D) $12

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Definitions:

Optimal Order Quantity

The most efficient amount of inventory to order, minimizing costs while meeting demand.

Base Price

The initial cost of a good or service before any discounts, additional fees, or taxes are applied.

Percentage Discount

A reduction from the original price of a product or service expressed as a percentage of the original price.

Quantity Discount

A price reduction offered to buyers for purchasing large volumes, encouraging bulk purchases.