Division A, which is operating at capacity, produces a component that currently sells in a competitive market for $25 per unit. At the current level of production, the fixed cost of producing this component is $8 per unit and the variable cost is $10 per unit. Division B would like to purchase this component from Division A. The price that Division A should charge Division B for this component is:
A) $10 per unit.
B) $18 per unit.
C) $20 per unit.
D) $25 per unit.
E) $35 per unit.

Question

Quizplus · Accepted Answer

Since Division A is operating at capacity and sells the component in a competitive market for $25 per unit, it would not make sense to sell it internally for less than the market price. Selling to Division B at the market price of $25 ensures Division A does not lose potential revenue from external sales.

Division A, Which Is Operating at Capacity, Produces a Component