Hello,

I need to know how they got $5.80 opportunity cost?

Thank you!

Frocks and Gowns, Incorporated, has two divisions, Day Wear and Night Wear. The Day Wear Division has an investment base of $830,000 and produces and sells 127,000 units of Collars at a market price of $13.40 per unit. Variable costs for the Collars total $7.60 per unit and fixed charges are $3.30 per unit (based on a capacity of 134,000 units). The Night Wear Division wants to purchase 29,000 units of Collars from the Day Wear Division. However, the Night Wear Division is only willing to pay $9.45 per unit. What is the minimum transfer price that the Day Wear Division would accept for the 29,000 unit order from the Night Wear Division if it wishes to maintain its pre-order contribution margin? A. $7.60. B. $3.30. C. $12.00 D. $13.20. Idle capacity = 134,000 - 127,000 = 7,000 units; Transfer price of 7,000 units = $7.60 (outlay costs). Transfer price of additional 22,000 units = $7.60 (outlay costs) + $5.80 (opportunity cost) = $13.40; Transfer price to maintain contribution margin = [(7,000 * $7.60) + (22,000 x $13.40)]/29,000 units = $12.00