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

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Definitions:

Face Value

The nominal value stated on a financial instrument, such as a bond or stock certificate.

Present Value

The current economic value of a future financial sum or sequence of inflows, determined by a particular rate of return.

Coupon Rate

The interest rate stated on a bond when issued, which represents the annual interest payment made to bondholders.

Articles of Confederation

The original constitution of the 13 American states, ratified in 1781, which was replaced by the U.S. Constitution in 1789 due to its weakness in central government powers.