RedEx Transport's Rail Division Has an Annual Capacity to Process

Multiple Choice

RedEx Transport's Rail Division has an annual capacity to process 800,000 tons of gravel used as a base under railroad tracks by railroads. The normal selling price is $62 per ton. At current operating levels, fixed costs are $10 per ton and variable costs are $32 per ton. The Air Division of RedEx Transport would like to buy 200,000 tons of gravel from the Rail Division to use in producing quality aggregate to be used for runways. The Rail Division is operating at 80 percent of capacity. The Air Division currently buys the gravel for $55 per ton from an outside source. How much is the lowest transfer price the Rail Division should accept to maintain current profitability?

A) $55
B) $32
C) $62
D) $30