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:

Organic Product

A natural substance or compound obtained through biochemical processes from organisms or their parts.

Reaction

A process in which substances interact to form new substances with different properties, involving a reorganization of atoms or molecules.

Reaction Mechanism

A detailed step-by-step description of how reactants are converted into products, including the breaking and forming of bonds.

Organic Product

A compound that results from the chemical reactions between molecules containing carbon.