You have been provided with the following information for Division X of a decentralized company:
$$\begin{array} { | l | r | }
\hline \text { Selling price } & \$ 90 \
\hline \text { Variable cost per unit } & 66 \
\hline \text { Fixed costper unit } & 20 \
\hline \text { Sales volume (units) } & 22,500 \
\hline \text { Capacity (units) } & 26,000 \
\hline
\end{array}$$Division Y of the same company would like to purchase all of its units internally.Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm.What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier. )
A) $90.
B) $84.
C) $80.
D) $66.

Question

You have been provided with the following information for Division X of a decentralized company: 
$$\begin{array} { | l | r | } 
\hline \text { Selling price } & \$ 90 \
\hline \text { Variable cost per unit } & 66 \
\hline \text { Fixed costper unit } & 20 \
\hline \text { Sales volume (units) } & 22,500 \
\hline \text { Capacity (units) } & 26,000 \
\hline
\end{array}$$Division Y of the same company would like to purchase all of its units internally.Division Y needs 6,000 units each period and currently pays $84 per unit to an outside firm.What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 6,000 from a supplier. )
A) $90.
B) $84.
C) $80.
D) $66.

Quizplus · Accepted Answer

For Division Y, the current cost of buying 6,000 units from an outside firm is $84 per unit. So, the total cost of buying 6,000 units will be 6,000 x $84 = $504,000.
For Division X, the lowest price that they can accept from Division Y will be the cost that is lower than $504,000 but still covers their costs and allows them to make a profit. Assuming that Division X wants to make a profit of at least $1 per unit, then the total cost for Division Y will be 6,000 x ($84 - $1) = $498,000.
So, the lowest price that Division X could accept from Division Y would be $498,000 / 6,000 units = $83 per unit. Since $80 is lower than $83, the answer is C.

You Have Been Provided with the Following Information for Division