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 that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers.From the point of view of Division A,any sales to Division B should be priced no lower than which of the following?
A) $17.
B) $18.
C) $29.
D) $30.

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 that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers.From the point of view of Division A,any sales to Division B should be priced no lower than which of the following?
A) $17. 
B) $18. 
C) $29. 
D) $30.

Quizplus · Accepted Answer

Since Division A has ample idle capacity and no increase in fixed costs, the minimum price should cover the variable costs, which is $17.

Division a Produces a Part with the Following Characteristics