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Royal Products, Incorporated, has a Connector Division that manufactures and sells a number of products, including a standard connector that could be used by another division in the company, the Transmission Division, in one of its products. Data concerning that connector appear below: Capacity in units 66,000 Selling price to outside customers $ 69 Variable cost per unit $ 21 Fixed cost per unit (based on capacity) $ 35 The Transmission Division is currently purchasing 6,000 of these connectors per year from an overseas supplier at a cost of $65 per connector. What is the maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division

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Answer:

The maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division is $65 per connector.

Explanation:

The maximum price that the Transmission Division should be willing to pay for connectors transferred from the Connector Division is $65 per connector which is the price at which it is currently purchasing from an overseas supplier.

The reason is that at the price of $65 per connector, the Transmission Division will neither save nor lose from buying from either the Connector Division or the overseas supplier.

However, if the Connector Division decides to sell to the Transmission Division at any price higher than $65 per connector, it will be better for the Transmission Division to buy from the overseas supplier to save cost.

For example, if the Connector Division decides to sell to the Transmission Division at $66 per connector, the Transmission Division will save $6,000 (i.e. 6000 * ($66 - $65) = $6,000) buying from the overseas supplier.