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Division A produces a part with the following characteristics: Capacity in units 50,000 Selling price per unit $ 30 Variable cost per unit $ 18 Fixed cost per unit $ 3 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:

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yemmy

Answer:

$29

Explanation:

Initial Profit for division B is given thus

Profit = Unit profit * production total

at selling price of $30

Unit profit = $30 - ($18 + $3) = $9

profit = $9 * 50,000 = $450, 000

By selling to division B, Division A saves in variable cost

that is, new variable cost = $18 - $1 = $17

In order for division A to still maintain a Profit of $450,000

It must sell to Division B at a price not less than say $ x

we get x as follows

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

x - 20 = 450000/50000

x - 20 = 9

x = 9 + 20

x = $29

sales to division B should be priced no lower than $29

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