Division a Makes a Part That It Sells to Customers

question 170

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 is the lowest acceptable transfer price Division A should accept?

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

---

Definitions:

Significant Influence

A level of control or impact an investor has over an investee, typically indicated by ownership of 20% to 50% of voting shares, allowing influence over business decisions without full control.

Intercompany Transactions

Financial transactions occurring between two divisions or subsidiaries within the same parent company.

Strategic Investment

An investment made by a company to build a lasting interest in a related company to help further business objectives.

Significant Influence Investments

Investments in which the investor has the power to participate in the financial and operating policy decisions of the investee but does not control or jointly control them.