Division M Makes a Part That It Sells to Customers

question 47

Multiple Choice

Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price from the perspective of Division O?

• A) $75
• B) $66
• C) $16
• D) $50
• E) $25

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Definitions:

Monetary Policy

Actions by a central bank to influence the amount of money and credit in the economy to achieve macroeconomic objectives like controlling inflation.

Aggregate Demand

The total demand for all goods and services in an economy at a given overall price level and in a given time period.

Lag

A delay between an action and its effect or between two related events.

Federal Open Market Committee

The branch of the Federal Reserve Board that determines the direction of monetary policy in the United States.