Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 23

Auto-fit is a multidivisional firm that produces auto parts. It has the capacity for annual production of 100 units of a particular part. The marginal cost of producing each unit is $10. These units can be sold internally to other divisions or to external customers. The external market price is $20. The allocated share of corporate overhead for each part produced is $5. Total corporate overhead expenditures do not vary with the production of the part. How many units of the part should the company produce What is the theoretically correct transfer price (should the company decide to transfer the part internally) Explain.