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.

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