Reference no: EM131633887

Question - Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:

Selling price to outside customers$40

Variable cost per unit$30

Total fixed costs$10,000

Capacity in units$20,000

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?

$40

$38

$30

$29

$10