Division A produces a part with the following characteristics:

Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
-Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price.From the point of view of Division A,any sales to Division B should be priced no lower than which of the following?
A) $20.
B) $27.
C) $28.
D) $29.

Question

Division A produces a part with the following characteristics:

Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
-Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price.From the point of view of Division A,any sales to Division B should be priced no lower than which of the following?
A) $20. 
B) $27. 
C) $28. 
D) $29.

Quizplus · Accepted Answer

Division A should only consider selling to Division B if the price offered is higher than the outside market selling price and it covers the variable cost avoided. Since the outside market selling price is $28 and Division A can avoid $1 in variable costs, the minimum price should be $29. Therefore, choice D is the correct answer as it is the only option that is higher than $29.

Division a Produces a Part with the Following Characteristics