Division a Makes a Part That It Sells to Customers

Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below: $\begin{array}{lrr}\text { Selling price to outside customers } & \$ & 40 \\\text { Variable cost per unit } & \$ & 30 \\\text { Total fixed costs } & \$ &10,000 \\\text { Capacity in units } && 20,000\end{array}$

Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A?

A) $40
B) $30
C) $29
D) $10
E) $38

Correct Answer:

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