Question

Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided. Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than:

Answer 1

Answer:

$29

Explanation:

Calculation to determine what any sales to Division B should be priced no lower than:

First step is to calculate the Profit

Profit = [$30 - ($18 + $3) ]*50,000

Profit= $9 * 50,000

Profit= $450, 000

Second step is to calculate the new variable cost

New variable cost = $18 - $1

New variable cost= $17

Now let determine the any sales to Division B should be priced no lower than:

Let x represent what Division B should be priced no lower than

[x - ($17 + $3) ] * 50000=450000

x - 20 = 450000/50000

x - 20 = 9

x = 9 + 20

Hence:

x = $29

Therefore From the point of view of Division A, any sales to Division B should be priced no lower than:$29