Division a Makes a Part with the Following Characteristics

question 7

Multiple Choice

Division A makes a part with the following characteristics: 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 $24 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 $24 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:

• A) worse off by $30,000 each period.
• B) worse off by $10,000 each period.
• C) better off by $15,000 each period.
• D) worse off by $35,000 each period.

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Definitions:

Cost Of Living Adjustment

An increase in income or wages to counteract inflation, aimed at maintaining an individual's standard of living.

Education

The systematic process of facilitating learning, or the acquisition of knowledge, skills, values, beliefs, and habits through various means such as teaching, training, storytelling, discussion, and directed research.

Economic Recession

A temporary slump in economic activities, with reduced trade and industry output, often determined by a continuous fall in GDP over two quarters.

Permanent Income

A theory suggesting individuals base their consumption patterns on their long-term average income rather than their current income.