Division X Makes a Part That It Sells to Customers

question 98

Multiple Choice

Division X 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 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 formula in the text, what is the lowest acceptable transfer price from the standpoint of the selling division?

• A) $30
• B) $50
• C) $46
• D) $20
• E) $49

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Definitions:

Debt Investments

Financial assets purchased with the expectation that the loan made to the issuer (such as bonds) will be paid back with interest.

Available-For-Sale Security

A financial asset that is purchased with the intent of selling before its maturity date but not classified as actively traded or held to maturity.

Realized Gain

The profit made from the sale of an asset, which becomes evident upon completion of the transaction.

Fair Value

The estimated market price of an asset or liability, assuming knowledgeable, willing parties in an arm's length transaction.