Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below:
$\begin{array}{lr}
\text { Selling Price to Outside Customers } & \$ 75 \
\text { Variable Cost per Unit } & \$ 50 \
\text { Total Fixed Costs } & \$ 400,000 \
\text { Capacity in Units } & 25,000
\end{array}$
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 $70 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 already sell all of the units it can produce on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?
A) $16.
B) $50.
C) $66.
D) $75.

Question

Division X makes a part that it sells to customers outside of the company.Data concerning this part appear below: 
$\begin{array}{lr}
\text { Selling Price to Outside Customers } & \$ 75 \
\text { Variable Cost per Unit } & \$ 50 \
\text { Total Fixed Costs } & \$ 400,000 \
\text { Capacity in Units } & 25,000
\end{array}$ 
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 $70 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 already sell all of the units it can produce on the outside market.What should be the lowest acceptable transfer price from the perspective of Division X?
A) $16.
B) $50.
C) $66.
D) $75.

Quizplus · Accepted Answer

The lowest acceptable transfer price for Division X is the market price of $75, as Division X can sell all its units at this price to outside customers. Selling to Division Y at a lower price would mean losing potential revenue.

Division X Makes a Part That It Sells to Customers