The Post Division of the M.T. Woodhead Company produces basic posts
which can be sold to outside customers or sold to the Lamp Division of
the M.T. Woodhead Company. Last year the Lamp Division bought all of its
30,800 posts from Post at $1.85 each. The following data are available
for last year\'s activities of the Post Division:
Capacity in units 310,000 posts
Selling price per cost to outside customers $2.08
Variable costs per post $1.34
Fixed costs, total $162,000
The total fixed costs would be the same for all the alternatives
considered below. Suppose the transfers of posts to the Lamp Division
cut into sales to outside customers by 19,500 units. What is the lowest
transfer price that would not reduce the profits of the Post Division?
1. $2.08
2. $1.34
3. $1.81
4. $1.79
