Division a Makes a Part That It Sells to Customers

question 197

Multiple Choice

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: 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 cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A?

• A) $40
• B) $38
• C) $30
• D) $29
• E) $10

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Definitions:

Picture Framer

A professional or business specialized in enclosing pictures, photographs, or artwork in frames.

Law of Diminishing Returns

An economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, will begin to decrease, assuming all other variables are constant.

Short Run

A time period in economics during which at least one input is fixed while others are variable.

Marginal Products

The additional output that is produced by utilizing one more unit of a variable input, holding all other inputs constant.