Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | }
\hline \text { Selling price to outside customers } & \$ 50 \
\hline \text { Variable cost per unit } & \$ 30 \
\hline \text { Total fixed costs } & \$ 400,000 \
\hline \text { Capacity in units } & 25,000 \
\hline
\end{array}$$ Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X can sell all of the units it makes to outside customers.What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $50.
B) $49.
C) $46.
D) $30.

Question

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | } 
\hline \text { Selling price to outside customers } & \$ 50 \
\hline \text { Variable cost per unit } & \$ 30 \
\hline \text { Total fixed costs } & \$ 400,000 \
\hline \text { Capacity in units } & 25,000 \
\hline
\end{array}$$ Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X can sell all of the units it makes to outside customers.What is the lowest acceptable transfer price from the standpoint of the selling division?
A) $50.
B) $49.
C) $46.
D) $30.

Quizplus · Accepted Answer

The lowest acceptable transfer price for Division X is the market price of $50, as it can sell all units to outside customers at this price. Selling to Division Y at a lower price would result in lost revenue.

Division X Makes a Part That It Sells to Customers