Peppertree Company has two divisions, East and West. Division East manufactures
ID: 2527021 • Letter: P
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 $1.59 per unit; full cost is $1.95. The component sells on the open market for $4.90. (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
Since East division has the excess capacity so the variable cost incurred is relevant for east division if it is considering the lowest price at which it can offer to west division. So the minimum price East will accept for the component: $1.59.
From the point of view of west division , the maximum price that can be offered is the price at which it is buying the component from open market. Thus the maximum price that Division West will pay for it is : $4.9
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