Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What is the lowest acceptable transfer price Division A should accept?
A) $40
B) $38
C) $30
D) $29
E) $10

Question

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:  Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What is the lowest acceptable transfer price Division A should accept?
A) $40 
B) $38 
C) $30 
D) $29 
E) $10

Quizplus · Accepted Answer

Since Division A has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost that would be incurred or $29 per unit (= $30 per unit − $1 per unit).

Division a Makes a Part That It Sells to Customers