Question

14) The West and East Divisions are divisions in the same company. Currently the East Division buys a part from West Division for $384 per unit. The West Division wants to increase the price of the part it sells to East Division by $96 to $480. The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero. The manager of the East Division can buy the part from an outside supplier for $448 per unit. The cost data pertaining to the part is supplied by the West Division:

Direct materials $136

Direct labor 200

Variable overhead 40

Fixed overhead 42

If West Division does not produce the parts for the East Division, it will be able to avoid one-third of the fixed manufacturing overhead costs. The West Division has excess capacity but no alternative uses for the facilities. West Division normally sells the part outside the company for $400 per unit. What is the minimum transfer price per unit that West Division should charge East Division?

A) $376

B) $390

C) $400

D) $448

Answer: B

Why the answer is B..?........I need explanation for that and if B) $390 minimum transfer price what is the maximum? ....thank you

Answer #1

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Currently the East Division buys a part from West Division for $384
per unit. The West Division wants to increase the price of the part
it sells to East Division by $96 to $480. The manager of the East
Division has stated that he cannot pay that much insofar as the
division's profit goes below zero. The manager of the East Division
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