The Ink and Paper Divisions Are Part of the Same

question 33

Multiple Choice

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
-What is the maximum transfer price that should be charged?

• A) $240.00
• B) $224.00
• C) $194.40
• D) $207.20

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Definitions:

Past Earnings

The historical profits or net income that a company has generated over a specific period, often used as an indicator of financial health and operational success.

Future Earnings

The projected income a company or individual is expected to generate over a future period.

Intangible Assets

Assets that lack physical substance but have value, such as intellectual property, brand reputation, and copyrights.

Goodwill

An intangible asset representing the value of a company's brand, customer relationships, and other non-physical assets.