Division X Makes a Part That It Sells to Customers

question 110

Multiple Choice

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside } & \$ 50 \\\text { customers } & \\\hline \text { Variable cost per unit } &\$ 30 \\\hline \text { Total fixed costs } & \$ 400,000\\\hline \text { Capacity in units } & 25,000\\\hline\end{array}$$ Division Y of the same company would like to use the part manufactured by Division X in one of its products.Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X.Division Y requires 5,000 units of the part each period.Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales.According to the formula in the text,what is the lowest acceptable transfer price from the standpoint of the selling division?

• A) $50.
• B) $49.
• C) $46.
• D) $30.

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Definitions:

Equivalent Units

A concept in cost accounting used to allocate costs to partially completed goods, expressed in terms of the amount of finished goods.

Transferred In Costs

Expenses associated with products or components that are moved from one process, department, or location to another within a manufacturing operation.

FIFO Costing

An inventory valuation method that assumes the first items purchased or produced are the first ones sold, affecting the cost of goods sold and ending inventory.

Opening WIP Inventory

The value of unfinished goods that a company has at the beginning of an accounting period.