The West Division Produces a Part with the Following Characteristics

question 100

Multiple Choice

The West Division produces a part with the following characteristics: $$\begin{array} { l r } \text { Capacity (units) } & 20,000 \\\text { Selling price per unit } & \$ 33 \\\text { Variable cost per unit } & \$ 18 \\\text { Fixed cost per unit } & \$ 4\end{array}$$ East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division's perspective, what is the minimum sales transfer price that West division should charge to the East Division?

• A) $14
• B) $28
• C) $18
• D) $13

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Definitions:

Par Value

The face value of a bond or stock as stated by the issuer.

Consolidated Common Stock

Shares that represent ownership in a corporation that has combined its financial statements with those of its subsidiaries to present a single set of financials for the entire enterprise.

Acquisition Business Combination

An acquisition business combination is a transaction or event where one entity gains control over another, often involving the purchase of the target company's stock or assets.

Fair Value

The estimated market value of an asset or liability, reflecting the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.