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

Because Division A is already operating at capacity, it would have to charge Division B at least $29 per unit ($30 per unit less the $1 per unit in variable cost that can be avoided by transferring internally rather than selling on the external market).

Division a Produces a Part with the Following Characteristics