Division a Makes a Part That It Sells to Customers

question 58

Multiple Choice

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
$$\begin{array} { l r r } \text { Selling price to outside customers } & \$ 40 \\\text { Variable cost per unit } & \$ 30 \\\text { Total fixed costs } & \$ 10,000 \\\text { Capacity in units } & 20,000\end{array}$$
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 $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 impacting sales to outside customers. If Division A sells to Division B, the variable cost per unit would be $1 lower than when selling to outside customers. What should be the lowest acceptable transfer price from the perspective of Division A?

• A) $40.
• B) $38.
• C) $30.
• D) $29.

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Definitions:

Dollar Sales

The total revenue generated from the sale of goods or services, measured in dollars.

Fixed-price Policy

A pricing strategy where a product or service is sold at a specific price that does not change in response to market fluctuations or customer negotiations.

No Haggle

A pricing strategy where the seller sets a fixed price for a product or service, eliminating the need for negotiation.

CarMax Dealership

A chain of used-car dealerships in the United States known for its no-haggle pricing and comprehensive vehicle inspection process.