Question

Division X makes a part with the following characteristics:

Production capacity in units 33,500
Selling price to outside customers $23
Variable cost per unit $17
Fixed cost, total $100,400
Division Y, another division of the same company would like to purchase 14,300 units of the part each period from Division X. Division Y is now purchasing these parts from an outside supplier at a price of $19 each.
Suppose Division X has ample idle capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $19 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:_________.
a. worse off by $85,800 each period.
b. better off by $57,200 each period.
c. worse off by $28,600 each period.
d. worse off by $114,400 each period.

Answer 1

If Division X refuses to accept the $19 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:_________.

c. worse off by $28,600 each period.

Step-by-step explanation:

The $28,600 loss the company incurs is from the lost contribution that Division Y's purchase of Division X's parts could have brought to the company if it buys parts inhouse. This is calculated as follows:

Division X's variable cost per unit = $17

Division X's selling price to outside customers = $23

Division Y's offered buying price = $19

The contribution = $2 ($19 - $17)