The Pillar Division of the Gothic Building Company Produces Basic

question 81

Multiple Choice

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | } \hline \text { Capacity in units } & \begin{array} { r } 300,000 \\\text { pillars }\end{array} \\\hline \text { Selling price per pillar to outside } & \$ 1.75 \\\text { customers } & \\\hline \text { Variable costs per pillar } & \$ 0.90 \\\hline \text { Fixed costs, total } & \$ 150,000\\\hline\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 15,000 units.What is the lowest transfer price that would not reduce the profits of the Pillar Division?

• A) $0.90.
• B) $1.35.
• C) $1.41.
• D) $1.75.

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Definitions:

Total Revenue

The total amount of money generated from the sale of goods or services before any expenses are subtracted.

Price Elasticity

A measure of how much the quantity demanded of a good or service changes in response to a change in its price.

Consumption Reduction

A decrease in the amount of goods and services consumed by individuals or communities, often aimed at saving resources or money.