Question

The Tire Division of Traker Company produces tires for off-road sport vehicles. One-third of Tire's output is sold to an internal division of Traker; the remainder is sold to outside customers. Tire's estimated operating profit for the year is: Internal Outside Sales $ 150,000 $ 400,000 Variable costs 100,000 200,000 Fixed costs 30,000 60,000 Operating profits $ 20,000 $ 140,000 Unit sales 10,000 20,000 The internal division has an opportunity to purchase 10,000 tires of the same quality from an outside supplier on a continuing basis.

The Tire Division cannot sell any additional products to outside customers. What is the minimum selling price that Tire should accept from the internal division?

Answer 1

As the Tire division has excess capacity, the minimum selling price would be equal to Variable cost per unit.

No outside sales are lost, so the contribution margin lost(opportunity cost) is $0

Minimum selling price

10.00

=100000/10000