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    Payment to an external supplier for this unit

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    3. Phoenix Ltd. has two divisions - A and B; each of which have sufficient capacity to meet product demand; and there is unlimited demand for their products. Division A sells their product to external customers at a price of $5,400 per unit and to Division B at $3,200 per unit. Each unit costs Division A $1,075 in variable manufacturing costs and $2,750 in fixed manufacturing costs. Phoenix is planning to increase all sales prices (internal and external sales) by 22% for the next year.

    It is expected that production volume will not change as a result of this price change. Because of this proposed price increase Division B is looking at purchasing the unit from an external supplier, however they are unsure as to how much they should be willing pay for the unit. If Division B does purchase the unit from an external supplier then 40% of the fixed manufacturing costs (fixed costs incurred specifically on units transferred internally, i.e. special handling) can be eliminated. Given this information, and from the company's perspective, what is the most that Division B should pay an external supplier for this unit?

    a. $1,100
    b. $1,727
    c. $2,175
    d. $2,827
    e. $4,305

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    Division B should pay an external supplier for this unit to the amount which it has ...

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    Response provides steps for calculation of payment to an external supplier for this unit