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Division A normally purchases its parts from Division B of the same company. Division A has learned that Division B is increasing its price to $110 per unit. As a result, the Division A manager has decided to purchase the parts from an outside supplier at a unit cost of $100, $10less than it would cost to purchase the same part from Division B. The Division B manager has explained that inflation is the cause of the price increase and that the loss of parts normally transferred to Division A will hurt the division as well as the company profits. The Division Bmanager feels that the company as a whole would benefit from the sale of parts to Division A. The following costs and unit purchases represent the normal annual transaction:
Units purchased
1,000
Division B's variable costs per unit
$95
Division B's fixed cost per unit
$10
1. Will the company as a whole benefit if Division A purchases the units from the outside supplier for $100 per unit? Assume that there are no alternative uses for Division B's facilities.
2. What would be the effect if the outside selling price decreases by $8.00 per unit, assuming that Division B remains idle?
3. If Division B's facilities could be put into production for other sales at an annual cost saving of $14,500, should Division A still purchase from the outside?
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