Peppertree Company has two divisions, East and West. Division East manufactures

Question

Peppertree Company has two divisions, East and West. Division East manufactures a component that Division West uses. The variable cost to produce this component is $1.58 per unit; full cost is $2.06. The component sells on the open market for $5.02. (Enter your answers in 2 decimal places.)

Assuming Division East has excess capacity, what is the lowest price Division East will accept for the component?



Assuming Division East has excess capacity, what is the highest price that Division West will pay for it?

Explanation / Answer

Answers

If Division East has excess capacity, this means that cost that t will incur to produce the additional component will be only Variable cost. No outside sale will be affected and there will no loss of contribution margin.

Hence, the lowest price Division East will accept for the component = Variable cost per component = $1.58 per unit.

Division West can purchase the component in an open market at $5.02 per unit. Hence, the highest price that Division West will pay to Division East for each component will be $5.01 because, at $5.02 it can purchase it from outside.

Hence, answer is $5.01 per unit.

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