Division M Makes a Part That It Sells to Customers

question 122

Multiple Choice

Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below: $\begin{array}{lrr}\text { Selling price to outside customers } & \$ & 75 \\\text { Variable cost per unit } & \$ & 50 \\\text { Total fixed costs } & \$ & 400,000 \\\text { Capacity in units } && 25,000\end{array}$
Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price from the perspective of Division O?

• A) $16
• B) $25
• C) $66
• D) $75
• E) $50

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Definitions:

Acetylcholine

A neurotransmitter in both the peripheral and central nervous systems that plays a crucial role in muscle contraction and cognitive functions.

Parasympathetic

The parasympathetic nervous system is one of the two divisions of the autonomic nervous system, responsible for conserving energy and reducing bodily functions like heart rate.

Sympathetic

Feeling, showing, or expressing sympathy, understanding, or compassion towards others.

Somatic

Relating to or affecting the body, distinct from the mind.