Division X Makes a Part That It Sells to Customers

question 53

Multiple Choice

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$\begin{array}{|l|r|}\hline \text { Selling Price to Outside Customers } & \$ 50 \\\hline \text { Variable cost per Unit } & \$ 30 \\\hline \text { Total Fixed Costs } & \$ 400,000 \\\hline \text { Capacity in Units } & 25,000 \\\hline\end{array}$
Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.According to the transfer pricing formula,what is the lower limit on the transfer price?

• A) $30.
• B) $46.
• C) $49.
• D) $50.

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Definitions:

Moral Hazard

A scenario in which an entity is prone to engage in risky behaviors knowing that another party will shoulder the consequences of such risks.

Adverse Selection

Adverse selection also pertains to the tendency of those in dangerous jobs or high-risk lifestyles to acquire life or health insurance to a greater extent than those with lower-risk profiles, thereby distorting the market.

Unobservable Actions

Actions taken by individuals or entities that cannot be seen or measured directly, often relevant in contexts of performance evaluation or trust.

Moral Hazard

The situation where one party to a transaction can take risks without having to suffer consequences, often because another party bears the cost of those risks.