Division A makes a part with the following characteristics: Division B, another
ID: 2534296 • Letter: D
Question
Division A makes a part with the following characteristics:
Division B, another division of the same company, would like to purchase 17,300 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $20 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 A refuses to accept the $20 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:
Multiple Choice
worse off by $86,500 each period.
worse off by $34,600 each period.
worse off by $51,900 each period.
worse off by $69,200 each period.
Production capacity in units 30,200 units Selling price to outside customers $ 22 Variable cost per unit $ 17 Total fixed costs $ 102,900Explanation / Answer
C. worse off by $51,900 each period.
Instead of incurring a cost of $17 per unit, the company would have to incur a cost of $20 per unit to purchase from an outside supplier. Therefore, the company would be worse off by $51,900 per period = ($20 per unit - $17 per unit) * 17,300 units per period.