Division a Produces a Part with the Following Characteristics

question 210

Multiple Choice

Division A produces a part with the following characteristics: Division B,another division in the company,would like to buy this part from Division A.Division B is presently purchasing the part from an outside source at $28 per unit.If Division A sells to Division B,$1 in variable costs can be avoided.Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price.From the point of view of Division A,any sales to Division B should be priced no lower than:

• A)$27
• B)$29
• C)$20
• D)$28
• E)$21

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Definitions:

Producer Surplus

The difference between the amount producers are willing to accept for a good or service versus how much they actually receive.

Price

The budgeted sum anticipated, imposed, or tendered in indemnity for something.

Surplus Amount

The excess quantity of a product that occurs when the supply of the product exceeds the demand for it at a given price.

Consumer Surplus

A measure of the difference between the total amount that consumers are willing and able to pay for a good or service versus the total amount that they actually do pay.