The Pen and Pencil Divisions Are Part of the Same

question 80

Multiple Choice

The Pen and Pencil Divisions are part of the same company. Currently the Pencil Division buys a part ingredient from Pen for $96. The Pen Division wants to increase the price of the part it sells to Pencil by $24 to $120. The manager of Pencil has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Pencil can buy the part from an outside supplier for $112. The cost data for the Pen Division is as follows:
If Pen ceases to produce the parts for Pencil, it will be able to avoid one-third of the fixed manufacturing overhead. The Pen Division has excess capacity but no alternative uses for its facilities.
-What is the maximum transfer price that should be charged?

• A) $120.00
• B) $112.00
• C) $97.20
• D) $103.60

---

Definitions:

Interest Rates

The cost of borrowing money or the return for investing money, typically expressed as a percentage of the principal amount per year.

Primary Reserves

Liquid assets held by financial institutions as a primary means to meet immediate withdrawal demands or regulatory requirements.

Secondary Reserves

Liquid assets that can quickly be converted into cash but are not held as compulsory reserves by a financial institution.

Components

The individual parts or elements that make up a larger object or system.