Division South does not have excess capacity to produce Product Y. The division can sell Product Y for $10 per unit outside the company. Variable costs are $6 per unit. Division North wants to purchase Product Y from Division South to use in Product ZZ. The selling price of Product ZZ is $25 per unit and variable costs to finish the product after the transfer are $12 per unit. An outside supplier will sell Product Y for $12 per unit. What is the maximum price Division North will pay for Product Y?

The maximum price Division North will pay for Product Y is $12.

Explanation:

With the information given, the transfer price will be fall between the price Division South can sell outside and the price the Division North can buy outside or between $10 to $12.

Besides, when buying at $12, Division North can still enjoy the margin of $1 per one Product ZZ sold; as cost of good sold = Cost of Product Y + Cost of further production = 12 + 12 = $24 while cost of Product ZZ =25.

So, the maximum price Division North will pay for Product Y is $12.

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