Division a Makes a Part That It Sells to Customers

question 35

Multiple Choice

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } \text { Selling price to outside customers } & \$ 75 \\\text { Variable cost per unit } & \$ 50 \\\text { Total fixed costs } & \$ 400,000 \\\text { Capacity in (units) } & 25,000\end{array}$$
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 $70 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division A?

• A) $75.
• B) $66.
• C) $16.
• D) $50.

---

Definitions:

Errors

Mistakes or inaccuracies in actions, calculations, or judgments.

Expectancy

The anticipation or belief about the likelihood of an event occurring in the future.

Perceived Relationship

The subjective understanding or interpretation of the nature, quality, and dynamics of a connection between entities.

Expectancy Model

A psychological theory that explains motivation as a process where individuals evaluate the likelihood that their efforts will lead to desired outcomes.