Giga-Stuff, Inc -Refer to the Figure

question 19

Multiple Choice

Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X:
Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives) .
$$\begin{array} { l r } \text { Direct materials } & \$ 0.30 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.70 \\\text { Fixed overhead } & 1.00 \\\text { Total } & \$ 2.15\end{array}$$
-Refer to the Figure.Assume that Giga-Stuff allows negotiated transfer pricing.What is the ceiling of the bargaining range,and which division sets it?

• A)$2.15; Sophistosand
• B)$2.15; Videostuff
• C)$2.50; Sophistosand
• D)$2.50; Videostuff

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Definitions:

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Laws in the United States designed to prevent monopolies and promote competition among businesses.

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Deliberate deception or misrepresentation intended to result in financial or personal gain at the expense of another party.

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