Division X Makes a Part That It Sells to Customers

question 67

Multiple Choice

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$\begin{array}{lr}\text { Selling Price to Outside Customers } & \$ 50 \\\text { Variable Cost per Unit } & \$ 30 \\\text { Total Fixed Costs } & \$ 400,000 \\\text { Capacity in Units } & 25,000\end{array}$
Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.According to the transfer pricing formula,what is the lower limit on the transfer price?

• A) $30.
• B) $46.
• C) $49.
• D) $50.

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Definitions:

Elastic

Describes a situation where the quantity demanded or supplied changes significantly when the price changes.

Marginal Revenue

The additional income received from selling one more unit of a good or service.

Marginal Cost

The additional cost incurred from producing one more unit of a good or service.

Profit Maximizes

The process or strategy of adjusting production and operations to achieve the highest possible profit.