All Montana Woolen Products has two divisions: a Fabric division that manufactures woolen fabrics and a Clothing

Question:

All Montana Woolen Products has two divisions: a Fabric division that manufactures woolen fabrics and a Clothing division that manufactures woolen dresses, coats, shirts, and accessories. All fabric used by the Clothing division is supplied by the Fabric division, which also supplies fabric to outside companies.

Required
a. Suggest a transfer price for the fabric assuming that the Fabric division is operating at only 60 percent of capacity due to a surge in popularity of “easy-care” fabrics made of polyester and rayon.
b. Suggest a transfer price for fabric assuming that the Fabric division is operating at capacity due to a revival of consumer interest in natural products and development of lightweight, wrinkle-resistant woolen fabrics.
c. Explain how your choices in parts a and b are related to the concept.

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...