Reference no: EM132603190

Division A makes a part with the following characteristics:

Production capacity in units.................. 15,000 units

Selling price to outside customers....... $30

Variable cost per unit............................. $20

Fixed cost per unit.................................. $4

Total fixed costs...................................... $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 now purchasing these parts from an outside supplier at a price of $28 each.

Question 1. 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 $28 price internally, the company as a whole will be:

A) worse off by $40,000 each period.

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

C) better off by $10,000 each period.

D) worse off by $30,000 each period.

Question 2. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $28 per unit (Division B's outside price), the company as a whole will be:

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

B) worse off by $10,000 each period.

C) worse off by $40,000 each period.

D) There will be no change in the status of the company as a whole.