Division A produces a component for Holden Ltd's main product

Question

Division A produces a component for Holden Ltd's main product - motor vehicles. The division operates as a profit centre. It also sells to outsiders. The present selling price is $75 per component. The company buys 600,000 units of a similar component per year from outside sources. The external purchase price is $73 as a result of a quantity discount. Division A has adequate capacity to supply the needs of the Assembly division. The following data are for Division A: $\begin{array}{ll}
\text { Direct material } & \$ 30 \text { per unit } \
\text { Direct labour } & \$ 25 \text { per unit } \
\text { Variable overhead } & \$ 10 \text { per unit } \
\text { Fixed overhead (based on a capacity of } & \$ 6 \text { per unit } \
5,000 \text { units) } &
\end{array}$
 The price range within which A would sell components to the Assembly Division is:
A) $65 to $73
B) $71 to $75
C) $71 to $73
D) $65 to $75

Quizplus · Accepted Answer

The minimum price at which Division A would sell components to the Assembly Division is the sum of direct material, direct labor, and variable overhead costs, which equals $65 ($30 + $25 + $10). The maximum price is the external purchase price of $73, as selling above this price would make it more economical for the company to continue purchasing from outside sources. Therefore, the price range is $65 to $73.