Reference no: EM132517304

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 per unit would be $1 lower.

Question 1: What should be the lowest acceptable transfer price from the perspective of Division A?

Option 1: $29

Option 2: $40

Option 3: $30

Option 4: $38