Question

You have been provided with the following information for Division X of a decentralized company:

Selling price	$	95
Variable cost per unit		62
Fixed cost per unit		29
Sales volume (units)		21,000
Capacity (units)		24,100

Division Y of the same company would like to purchase all of its units internally. Division Y needs 9,300 units each period and currently pays $89 per unit to an outside firm. What is the lowest price that Division X could accept from Division Y? (Assume that Division Y wants to use a sole supplier and will not purchase less than 9,300 from a supplier.)

Answer 1

Capacity (units)	24100
Less: Existing sales	21000
Excess capacity	3100
Existing sales lost	6200	=9300-3100
Variable cost of producing 9300 units	576600	=9300*62
Add: Contribution margin lost on existing sales	204600	=6200*(95-62)
Total minimum price to be charged	781200
Lowest price that Division X could accept from Division Y	84	=781200/9300