Division A produces a part with the following characteristics:
$\begin{array}{|l|r|}
\hline \text { Capacity in Units } & 50,000 \text { units } \
\hline \text { Selling Price per Unit } & \$ 30 \
\hline \text { Variable Costs per Unit } & \$ 18 \
\hline \text { Fixed Costs per Unit } & \$ 3 \
\hline
\end{array}$
Division B, another division in the company, would like to buy this part from Division A. Division B is presently 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 which of the following?
A) $20.
B) $27.
C) $28.
D) $29.

Question

Quizplus · Accepted Answer

Since Division A is operating at full capacity, selling to Division B means losing sales to the outside market. Therefore, the minimum price should cover the lost revenue from the outside market, which is the selling price of $30 minus the $1 savings in variable costs, resulting in $29.

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