Division West Does Not Have Excess Capacity to Produce Product

question 29

Multiple Choice

Division West does not have excess capacity to produce Product XX.The division can sell Product XX for $10 per unit outside the company.Variable costs are $6 per unit.Division East wants to purchase Product XX from Division West to use in Product ZZ.The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit.An outside supplier will sell Product XX for $11 per unit.What is the maximum price Division East will pay for Product XX?

• A) $11 per unit
• B) $12 per unit
• C) $13 per unit
• D) none of the above

---

Definitions:

Depletion Rate

The rate at which natural resources are consumed or used, often applied in accounting to allocate the cost of a natural resource over its useful life.

Residual Value

The estimated salvage value of an asset at the end of its useful life, important for depreciation calculations.

Oil Well

A drilling operation established for the extraction of oil from the earth, constituting a significant part of the oil and gas industry.

Amortization Expense

The methodical distribution of the expense of an intangible asset throughout its lifespan.