Division A produces a part with the following characteristics:
$\begin{array}{lrr}
\text { Capacity in units } & 50,000 \
\text { Selling price per unit } & \$ 30 \
\text { Variable costs per unit } & \$ 18 \
\text { Fixed costs per unit } & \$ 3
\end{array}$
Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
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Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:
A) $27.
B) $29.
C) $20.
D) $28.

Question

Division A produces a part with the following characteristics:
$\begin{array}{lrr}
\text { Capacity in units } & 50,000 \
\text { Selling price per unit } & \$ 30 \
\text { Variable costs per unit } & \$  18 \
\text { Fixed costs per unit } & \$ 3
\end{array}$
Division B, another division in the company, would like to buy this part from Division A. Division B is currently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
-
Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:
A) $27.
B) $29.
C) $20.
D) $28.

Quizplus · Accepted Answer

Division A should not sell below $29 because it can sell all units at $30 externally. Selling to Division B saves $1 in variable costs, making the minimum acceptable price $30 - $1 = $29.

Division a Produces a Part with the Following Characteristics Division B, Another Division in the Company, Would Like to