Division S sold a part to both Division P and outside customers last year. The revenues from these sales were $30,000 (1,000 units) and $35,000 (1,000 units), respectively. Next year, S plans to increase the unit sales price to $42 and wants a proportionate increase in the sales price to Division P. The unit costs are $9 variable and $15 fixed. If Division P does not agree to the price increase, 50% of Division S's fixed costs will be eliminated. What is the highest price Division P would be willing to pay for external purchases?
A) $36.00
B) $16.50
C) $30.00
D) $28.50

Question

Quizplus · Accepted Answer

Division S's total fixed costs are $15,000 (1,000 units x $15). If Division P does not agree to the price increase, 50% of Division S's fixed costs will be eliminated, or $7,500. This means that Division S's total fixed costs will be $7,500.Division S's total variable costs are $9,000 (1,000 units x $9).Division S's total costs are $16,500 ($7,500 + $9,000).Division S's target profit is $10,500 ($30,000 - $16,500).Division S's target price to Division P is $36 ($16,500 + $10,500) / 1,000 units.

Division S Sold a Part to Both Division P and Outside