4 Division West does not have excess capacity to produce Pro

4) Division West does not have excess capacity to produce Product XX. The division can sell Product XX for $10 per unit outside the company. Variable costs are $6 per unit. Division East wants to purchase Product XX from Division West to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product XX for $11 per unit. What is the maximum price Division East will pay for Product XX?

A) $11 per unit

B) $12 per unit

C) $13 per unit

D) none of the above

Answer: A

Why the aswer is A? I need explanation for that.

Solution

The answer is option A since if the division East buys the product from divsion West they have to incurr the cost of 12 per unit but if thye purchase from outsider they get it for $11 per unit. so the maximum price the East will be ready to pay for west for this product including transfer pricing is $11