Division M Makes a Part That It Sells to Customers

question 193

Multiple Choice

Division M makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division O of the same company would like to use the part manufactured by Division M in one of its products. Division O currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division M. Division O requires 5,000 units of the part each period. Division M can sell every unit it produces on the outside market. What should be the lowest acceptable transfer price?

• A) $75
• B) $66
• C) $16
• D) $50
• E) $25

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Definitions:

Factors

Factors are elements or conditions that are influential in determining outcomes.

Target Markets

Specific groups of potential consumers at whom a company aims its products or services, identified by demographic, geographic, and psychographic characteristics, or by purchasing behavior.

Compensating Balances

Minimum balance requirements mandated by banks for borrowers, serving as a form of security for the loan.

Effective Cost

Effective Cost is the total cost of a product or service once all relevant factors, including hidden costs and indirect expenses, are considered.