A company is highly centralized. The Cutting Division, which is operating at capacity, produces a component that it currently sells in a perfectly competitive market for $13 per unit. At the current level of production, the fixed cost of producing this component is $4 per unit and the variable cost is $7 per unit. The Grinding Division would like to purchase this component from the Cutting Division. The price that the Cutting Division should charge the Grinding Division per unit for this component is:
A) $7.
B) $11.
C) $13.
D) $15.

Question

Quizplus · Accepted Answer

Since the Cutting Division is operating at capacity and sells the component in a perfectly competitive market for $13, the opportunity cost of selling to the Grinding Division is $13. Therefore, the transfer price should be $13 per unit.

A Company Is Highly Centralized