Division A makes a part with the following characteristics:
Production capacity in units 15,000 units
Selling price to outside customers 30
Variable cost per unit 20
Fixed cost per unit 4
Total fixed costs 60,000
Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of 28 each.
Suppose 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 sales to outside customers. If Division A refuses to accept the 28 price internally, the company as a whole will be:
worse off by 30,000 each period.
better off by 10,000 each period.
worse off by 20,000 each period.
worse off by 40,000 each period.
The purchase price is $28.
Against this we have to see the ...
The solution explains the effect on the company of a transfer price.