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