Division A makes a part with the following characteristics: Production capacity
ID: 2515161 • Letter: D
Question
Division A makes a part with the following characteristics: Production capacity in units Selling price to outside customers (per unit) Variable cost per unit Total fixed costs 15,000 $25 $60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is currently purchasing these parts from an outside supplier at a price of $24 each. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division B continues to purchase parts from an outside supplier rather than from Division A, what will be the effect on the operating income of the company as a whole? o a. Higher by $5,000 each period O b. Lower by $30,000 each period. C.Lower by $5,000 each period. O d. None of the answers provided. o e. Higher by $30,000 each period.Explanation / Answer
Minimum transfer price acceptable to Division A = Variable cost per unit = 18
Outside supplier cost per unit = 24
Additional cost paid to outside supplier = 24 - 18 = 6 per unit
Effect on operating income = lower by 30,000 (5,000 Units * 6 per unit)
The answer is B.