Part 7B costs the Midwest Division of Frackle Corporation $30 to make, of which $21 is variable. Midwest Division sells Part 7B to other companies for $47. The Northern Division of Frackle Corporation can use Part 7B in one of its products. The Midwest Division has enough idle capacity to produce all of the units of Part 7B that the Northern Division would require. What is the lowest transfer price at which the Midwest Division should be willing to sell Part 7B to the Northern Division?
A) $30
B) $21
C) $17
D) $47
E) $20

Question

Quizplus · Accepted Answer

The lowest transfer price at which the Midwest Division should be willing to sell Part 7B to the Northern Division is its variable cost, which is $21. This is because if the transfer price is lower than the variable cost, the Midwest Division will incur a loss. If the transfer price is higher than the variable cost, the Northern Division will incur an unnecessary cost. Therefore, the best choice is option B, which represents the variable cost of Part 7B.

Part 7B Costs the Midwest Division of Frackle Corporation $30