Division X Makes a Part That It Sells to Customers

Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below: Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X?

A) $75
B) $66
C) $16
D) $50

Correct Answer:

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