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:
A) $27
B) $29
C) $20
D) $28
E) $21

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:
A) $27 
B) $29 
C) $20 
D) $28 
E) $21

Quizplus · Accepted Answer

Since 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, any sales to Division B should be priced at least as high as the outside selling price to maintain profitability. The outside selling price is $28 per unit, and if Division A sells to Division B, $1 in variable costs can be avoided. Therefore, Division A should charge Division B at least $29 per unit ($28 + $1) to maintain profitability. Hence, the correct answer is B) $29.

Division a Produces a Part with the Following Characteristics