Reference no: EM132603202

Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below:

Selling price on the intermediate market........ $30

Variable costs per unit....................................... $22

Fixed costs per unit (based on capacity)........ $7

Capacity in units............................................... 50,000

Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S.

Question 1: Suppose that Division S has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will:

A) gain $20,000 in potential profit.

B) lose $60,000 in potential profit.

C) lose $70,000 in potential profit.

D) lose $20,000 in potential profit.

Question 2:  Suppose that Division S can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be:

A) worse off by $80,000 each period.

B) worse off by $70,000 each period.

C) better off by $20,000 each period.

D) worse off by $20,000 each period.