Division C Makes a Part That It Sells to Customers

question 92

Multiple Choice

Division C makes a part that it sells to customers outside of the company.Data concerning this part appear below:
Division D of the same company would like to use the part manufactured by Division C in one of its products.Division D currently purchases a similar part made by an outside company for $79 per unit and would substitute the part made by Division C.Division D requires 1,000 units of the part each period.Division C has ample excess capacity to handle all of Division D's needs without any increase in fixed costs and without cutting into outside sales.According to the formula in the text,what is the lowest acceptable transfer price from the standpoint of the selling division?

• A) $75
• B) $79
• C) $54
• D) $69

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Definitions:

Interest On Capital

The return on investment that is required or anticipated for the money or capital invested in a business or project.

Salary Allowances

Additional compensations over the base salary that may cover various specific needs or expenses.

Net Income

The amount of revenue that remains after subtracting all expenses, taxes, and costs from total sales; a key indicator of financial health.

Salary Allowance

Salary allowance is a fixed amount of money paid to employees in addition to their regular salary, often to cover specific work-related expenses.