Question

Division A of Huskie, Inc. has operating data as follows: Capacity 20,000 units Selling price $80 per unit Variable costs $40 per unit Fixed costs $20 per unit Division B wants to purchase units from Division A. If Division A agrees to sell units to Division B, A's variable costs will be $5 less per unit. If Division A has capacity available to meet B's requirements, what is the minimum price it should charge? A. $30 B. $35 C. $40 D. $60

Answer 1

B. $35

Step-by-step explanation:

While making these kind of decisions relevant cost is to be considered.

Since there is an idle capacity lying to meet the demand of Division B, the fixed cost shall be avoided while making this decision.

Thus, concerned cost is variable cost. Since the company is supplying in its own company to other division there might be some avoidable cost in the nature of variable, as for example: transportation, selling and marketing.

Here it is $5

Thus, relevant variable cost = $40 - $5 = $35

This represents the correct option.