Division a Makes a Part That It Sells to Customers

question 107

Multiple Choice

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: $\begin{array}{lrr}\text { Selling price to outside customers } & \$ & 40 \\\text { Variable cost per unit } & \$ & 30 \\\text { Total fixed costs } & \$ &10,000 \\\text { Capacity in units } && 20,000\end{array}$

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 should be the lowest acceptable transfer price from the perspective of Division A?

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

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Definitions:

Bailee

An individual or entity given temporary possession but not ownership of personal property by another (the bailor) for a specific purpose.

Document of Title

A legal document or electronic record evidencing the right to control the disposition of goods, such as a bill of lading or warehouse receipt.

Right to Cooperation

This concept involves the expectation or requirement for parties in a legal agreement or obligation to work together towards the fulfillment of the terms of the agreement or resolution of any disputes.

Untimely

Untimely refers to something occurring or being done at an inappropriate, inopportune, or irregular time, often resulting in adverse effects or inconveniences.