Division X Makes a Part That It Sells to Customers

question 132

Multiple Choice

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$$\begin{array} { | l | r | } \hline \text { Selling price to outside customers } & \$ 50 \\\hline \text { Variable cost per unit } & \$ 30 \\\hline \text { Total fixed costs } & \$ 400,000 \\\hline \text { Capacity in units } & 25,000 \\\hline\end{array}$$ 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 can sell all of the units it makes to outside customers.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:

Monthly Fixed Cost

Regular, consistent costs that do not vary with production volume or business activity level, calculated on a monthly basis.

Budgeted Sales

The projected amount of sales revenue that a company plans to achieve in a specific period, based on market analysis and company goals.

Ending Inventory

The monetary amount of merchandise on hand for sale when an accounting cycle concludes, established by the initial stock plus purchases less the expenses of goods sold.

Production Budget

An estimate of the total units to be produced in a given period, factoring in expected sales and inventory requirements.