Division One of Loverei Company is currently operating at 70% of capacity. It produces a single product and sells all its production to outside customers for $70 per unit. Variable costs are $30 per unit and fixed costs are $20 per unit at the current production level. Division Two, which currently buys the same product from an outside supplier for $65 per unit, would like to buy the product from Division One. Division One will use one-half of its idle capacity if it decides to provide the requirements of Division Two. What is the minimum price that Division One should charge Division Two for this product?
Added by Miguel -Ngel D.
Step 1
First, we need to find the total cost per unit for Division One at the current production level. The total cost per unit is the sum of variable costs and fixed costs per unit. Total cost per unit = Variable cost per unit + Fixed cost per unit Total cost per unit Show more…
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