Division A produces a part with the following characteristics: 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:
A)$27
B)$29
C)$20
D)$28
E)$21

Question

Division A produces a part with the following characteristics:  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:
A)$27 
B)$29 
C)$20 
D)$28 
E)$21

Quizplus · Accepted Answer

From the perspective of Division A, if they sell to Division B, they will be able to avoid $1 in variable costs per unit. This means that the minimum price they should sell to Division B is $28 - $1 = $27 per unit in order for the transaction to be profitable. However, since Division A is currently operating at capacity and can sell all units at the usual selling price, it doesn't make sense for them to sell to Division B unless they are able to make a profit higher than this usual price.

Therefore, the best choice is option B, which states that Division A should price their sales to Division B no lower than $29. This ensures that they are making a profit higher than what they would make selling on the outside market and also covers the $1 in variable costs they would be avoiding by selling to Division B.

Division a Produces a Part with the Following Characteristics