Division A of Sibley, Inc. has operating data as follows: $$\begin{array} { l l }
\text { Capacity } & 20,000 \text { units } \
\text { Selling price } & \$ 80 \text { per unit } \
\text { Variable costs } & \$ 45 \text { per unit } \
\text { Fixed costs } & \$ 20 \text { per unit }
\end{array}$$ Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit.
If Division A is operating at capacity, what is the minimum price it should charge?
A) $40
B) $75
C) $20
D) $60

Question

Division A of Sibley, Inc. has operating data as follows: $$\begin{array} { l l } 
\text { Capacity } & 20,000 \text { units } \
\text { Selling price } & \$ 80 \text { per unit } \
\text { Variable costs } & \$ 45 \text { per unit } \
\text { Fixed costs } & \$ 20 \text { per unit }
\end{array}$$ Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit.
If Division A is operating at capacity, what is the minimum price it should charge?
A) $40
B) $75
C) $20
D) $60

Quizplus · Accepted Answer

The minimum price Division A should charge is its variable cost per unit minus the $5 savings, plus the fixed cost per unit. This is $45 - $5 + $20 = $60. However, since Division A is operating at capacity, selling to Division B means forgoing sales to external customers at the full selling price of $80. Therefore, the minimum price to not lose profit would be the selling price of $80 per unit. However, the closest option given to this rationale is $75, which considers the variable cost savings but seems to slightly miss the full selling price consideration. The correct choice based on the provided options and the need to cover variable costs plus the savings and contribute to fixed costs and profit margin is $75, acknowledging a slight discrepancy in the ideal answer.

Division a of Sibley, Inc Division B Wants to Purchase Units from Division A