Reference no: EM132603197

Division A of Tripper Company produces a part that it sells to other companies. Sales and cost data for the part follow:

Capacity in units.............................. 60,000

Selling price per unit....................... $40

Variable costs per unit.................... $28

Fixed costs per unit at capacity....$9

Division B, another division of Tripper Company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $38 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.

Question 1: Assume that Division A is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

A) $37

B) $39

C) $36

D) $38

Question 2:  Assume that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division?

A) $40

B) $39

C) $28

D) $27