Bissell, Inc. produces and sells a variety of household cleaning supplies and equipment including vacuum cleaners and carpet cleaner both of which are sold separately in stores. The carpet cleaning division incurs the following costs for the production of a single bottle of carpet cleaner when 600,000 bottles are produced each year:

Direct materials$1.30

Direct Labor$0.50

Variable Overhead$0.25

Fixed Overhead$0.30

Total Cost$2.35

The company sells the bottles to retail stores for $5.00 per bottle.The vacuum division is doing a promotion whereby each customer that purchases a vacuum cleaner during the month of December receives a free bottle of carpet cleaner.The vacuum division would like to purchase these bottles from the carpet cleaning division.

Assuming the carpet cleaning division has excess capacity and there would be no contribution margin lost on outside sales if they sell to the vacuum division, theminimum

transfer price that should be charged is:

a.$2.35

b.$2.65

c.$2.05

d. $5.00