You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { l l}
\text { Selling price } & \$ 45 \
\text { Variable cost per unit } & \$ 33 \
\text { Fixed cost per unit } & \$ 12 \
\text { Sales volume (units) } & 22,500 \
\text { Capacity (units) } & 25,000
\end{array}$$
The Blanket Division would like to purchase all of its units internally. The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier, what is the lowest price that Wool Division should accept from the Blanket Division?
A) $45.
B) $42.
C) $40.
D) $38.

Question

You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { l l} 
\text { Selling price } & \$ 45 \
\text { Variable cost per unit } & \$  33 \
\text { Fixed cost per unit } & \$ 12 \
\text { Sales volume (units) } & 22,500 \
\text { Capacity (units) } & 25,000
\end{array}$$
The Blanket Division would like to purchase all of its units internally. The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm. Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier, what is the lowest price that Wool Division should accept from the Blanket Division?
A) $45.
B) $42.
C) $40.
D) $38.

Quizplus · Accepted Answer

The lowest price the Wool Division should accept is the variable cost per unit ($33) plus the opportunity cost of lost sales ($7), which is the difference between the selling price ($45) and the external purchase price ($42), totaling $40.

You Have Been Provided with the Following Information for the Wool