Division a Makes a Part That It Sells to Customers

question 130

Multiple Choice

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What is the lowest acceptable transfer price Division A should accept?

• A) $40
• B) $38
• C) $30
• D) $29
• E) $10

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Definitions:

Industrial Market

The market for goods and services sold to and bought by businesses and institutions, rather than consumers.

Prescription Drugs

Medications that legally require a medical prescription to be dispensed, typically regulated by legislation to require a medical diagnosis and supervision by a licensed healthcare provider.

Diabetes Testing Supplies

Products and devices used by individuals with diabetes to monitor their blood sugar levels, such as glucose meters, test strips, and lancets.

Reseller

A business that purchases goods or services with the intention of selling them to others, rather than consuming or using them.