You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { | l | r | }
\hline \text { Selling price } & \$ 46 \
\hline \text { Variable cost per unit } & 33 \
\hline \text { Fixed costper unit } & 12 \
\hline \text { Sales volume (units) } & 22,500 \
\hline \text { Capacity (units) } & 26,000 \
\hline
\end{array}$$ The Blanket Division would like to purchase all of its units internally.The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm.What is the lowest price that Wool Division could accept from the Blanket Division? Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier,what is the lowest price that Wool Division could accept from the Blanket Division?
A) $45.
B) $42.
C) $40.
D) $38.

Question

You have been provided with the following information for the Wool Division of a decentralized company:
$$\begin{array} { | l | r | } 
\hline \text { Selling price } & \$ 46 \
\hline \text { Variable cost per unit } & 33 \
\hline \text { Fixed costper unit } & 12 \
\hline \text { Sales volume (units) } & 22,500 \
\hline \text { Capacity (units) } & 26,000 \
\hline
\end{array}$$ The Blanket Division would like to purchase all of its units internally.The Blanket Division needs 6,000 units each period and currently pays $42 per unit to an outside firm.What is the lowest price that Wool Division could accept from the Blanket Division? Assuming that the Blanket Division wants to use a sole supplier and will not purchase less than 6,000 from a supplier,what is the lowest price that Wool Division could accept from the Blanket Division?
A) $45.
B) $42.
C) $40.
D) $38.

Quizplus · Accepted Answer

The lowest price Wool Division could accept is the variable cost per unit, which is $33, plus any opportunity cost. Since Wool Division has excess capacity (26,000 - 22,500 = 3,500 units), it can produce 3,500 units without affecting current sales. For the remaining 2,500 units, the opportunity cost is the contribution margin ($46 - $33 = $13). Thus, the lowest price is $33 + ($13 * 2,500 / 6,000) = $40.

You Have Been Provided with the Following Information for the Wool