A large firm's automotive division receives parts from the parts unit at the same firm at a price of $450 each.Each part is produced at a marginal cost of $400 and the final product is sold for $5,000 each.Which of the following statements is true?

Question

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In order to maximize profit, the automotive division should pay the marginal cost of producing the parts, which is $400. This ensures that the firm is not overpaying for the parts and is able to reduce costs, resulting in higher profits. Option A is incorrect because the profit-maximizing price has not been determined. Option B is incorrect because the parts unit still incurs a marginal cost of $400 to produce each part. Option C is incorrect because outsourcing may not necessarily be the most profitable option. Option D is incorrect because increasing the price of the parts sold to the automotive division may not be feasible or optimal.

A Large Firm's Automotive Division Receives Parts from the Parts