Use the following to answer questions:
Vallarta Inc. has two divisions, P and Q, with the following information:

The variable cost of Division Q will be incurred regardless of where it purchases the components, internally or externally.
-Division Q would be willing to pay Division P as high as ____ for the component?
A) $25
B) $30
C) $38
D) $70

Question

Use the following to answer questions:
Vallarta Inc. has two divisions, P and Q, with the following information:
  
The variable cost of Division Q will be incurred regardless of where it purchases the components, internally or externally.
-Division Q would be willing to pay Division P as high as ____ for the component?
A) $25 
B) $30 
C) $38 
D) $70

Quizplus · Accepted Answer

Division Q would be willing to pay up to the point where it is indifferent between making the component in-house and purchasing it from Division P. This point is reached when the cost to Division Q of purchasing the component equals its own cost of producing the component in-house, which includes all variable costs and any avoidable fixed costs. Without specific numbers provided for these costs, we can't calculate the exact amount, but the question seems to imply that $38 is the maximum Division Q would pay, suggesting that this is the break-even point for Division Q between producing in-house and purchasing from Division P.

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