Reference no: EM132755766

Problem 1: Sorensen's Sod Supply Company has recently acquired a lawn sod company that grows turf grasses for lawns. Previously, Sorensen's was purchasing sod from other suppliers at 40 cents per square foot. The new sod division, which has substantial excess capacity, is able to produce grass sod at a cost of 25 cents per square foot, including direct materials and direct labor cost of 15 cents, variable overhead of 5 cents, and fixed overhead of 5 cents per square foot. The supply division manager argues that the transfer price should be no more than 25 cents per square foot. What transfer price between the sod and the supply divisions will lead the manger of the supply division to act in a manner that will maximize company profits?

Select one:

A. 20 cents
B. 40 cents
C. 35 cents
D. 25 cents