Maralee Company's Records Reveal the Following Variable Costs Division Y Wants to Buy the Component from Division X

question 74

Multiple Choice

Maralee Company's records reveal the following:
$\begin{array} { l }\text { Division X }\\ \text {Market price of finished component to outsiders }&\$ 32 \text { per unit } \\ \text {Variable costs per component }&\$ 24 \text { per unit } \\\text { Division Y }\\ \text {Sale price of finished product }&\$ 42 \text { per unit } \\\end{array}$

Variable costs:
$\begin{array}{ll}\text { Division } X(1 \text { component }) & ? \\\text { Division } Y \text { Assembly } & 9 \text { per unit } \\\text { Division } Y \text { Packaging } & 4 \text { per unit }\end{array}$
Division Y wants to buy the component from Division X.The variable costs of Division Y will be incurred whether it buys the component from Division X or from an outside supplier.Assume Division X is working at full capacity; there is no excess capacity.Division Y can buy the component from an outside supplier for $32 per unit.What is the lowest transfer price per unit Division X should accept from Division Y for the component?

• A) $8 per unit
• B) $22 per unit
• C) $24 per unit
• D) $32 per unit

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Definitions:

EBIT

Earnings Before Interest and Taxes, a measure of a firm's profit that includes all income and expenses (operating and non-operating) except interest and income tax expenses.

Operating Cash Flow

A measure of the cash generated by a company's normal business operations, indicating its ability to pay bills and fund investments.

Capital Spending

Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment to improve its operations and revenue.

Operating Cash Flow

The cash generated from the normal operating processes of a business, reflecting the company's ability to generate sufficient cash to meet its operating expenses.