Slings-Are-Us makes slings. Traditionally, they bought fabric in quantity, and cut out the forms for their slings from large pieces, discarding the interstitial material as scrap. Due to the integrated nature of the production facility, the cost of all this fabric was considered a joint cost, allocated by the approximate relative sales value method, and the scraps were considered a waste by-product.

Recently however, an enterprising employee had the great idea to use these scraps and make small, unique slings from the heretofore-discarded pieces of fabric. The company agreed to implement this idea on a trial basis, and the accounting department decided to consider these slings a by-product using the net realizable value method.

The marketing department set the price for the by-product slings at $50, and in the first year of production, 10,000 of these scrap slings were sold. At the end of the first year, the accounting department determined that each slings incurred additional processing costs of $40 on average in materials (straps, buckles, thread, etc.), labor, and variable overhead (not including the cost of the scrap fabric from whence they came).

After the first year, Slings-Are-Us realized that the demand for the by-product slings is so great that they cannot supply enough to meet the demand for direct market sales. In this case, what is the optimal transfer price that the by-product slings division should charge given this capacity constraint?

$0 per sling

$10 per sling

$40 per sling

$50 per sling