The West Division produces a part with the following characteristics: $$\begin{array} { l r }
\text { Capacity (units) } & 20,000 \
\text { Selling price per unit } & \$ 33 \
\text { Variable cost per unit } & \$ 18 \
\text { Fixed cost per unit } & \$ 4
\end{array}$$ East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division's perspective, what is the minimum sales transfer price that West division should charge to the East Division?

Question

The West Division produces a part with the following characteristics: $$\begin{array} { l r } 
\text { Capacity (units) } & 20,000 \
\text { Selling price per unit } & \$ 33 \
\text { Variable cost per unit } & \$ 18 \
\text { Fixed cost per unit } & \$ 4
\end{array}$$ East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division's perspective, what is the minimum sales transfer price that West division should charge to the East Division?

Quizplus · Accepted Answer

The Answer of The West Division produces a part with the following characteristics: $$\begin{array} { l r } 
\text { Capacity (units) } & 20,000 \
\text { Selling price per unit } & \$ 33 \
\text { Variable cost per unit } & \$ 18 \
\text { Fixed cost per unit } & \$ 4
\end{array}$$ East Division within the same company would like to buy this part from the West Division. The East Division is currently purchasing the part from an outside supplier for $40 per unit. If the West Division sells to the East Division, $5 in variable costs can be avoided. Suppose that the West Division has enough capacity to handle the demand from the East division with no change in fixed costs. From the West Division's perspective, what is the minimum sales transfer price that West division should charge to the East Division?

The West Division Produces a Part with the Following Characteristics