The Gear Division Makes a Part with the Following Characteristics

question 140

Multiple Choice

The Gear Division makes a part with the following characteristics:
$$\begin{array} { l l} \text { Production capacity } & 25,000 \text { units } \\\text { Selling price to outside customers } & \$ 18 \\\text { Variable cost per unit } & \$ 11 \\\text { Fixed cost, total } & \$ 100,000\end{array}$$
The Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division. The Motor Division now purchases the part from an outside supplier at a price of $17 each.
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Suppose the Gear Division has ample excess capacity to handle all of the Motor Division's needs without any increase in fixed costs and without impacting sales to outside customers. If the Gear Division refuses to accept the $17 price internally and the Motor Division continues to buy from the outside supplier, the company as a whole will be:

• A) worse off by $70,000 each period.
• B) better off by $10,000 each period.
• C) worse off by $60,000 each period.
• D) worse off by $20,000 each period.

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Definitions:

Separate but Equal

A legal doctrine in United States constitutional law that justified and permitted racial segregation as long as the separate facilities were supposedly of equal quality.

Brown v. Board of Education

A landmark United States Supreme Court case from 1954 that declared state laws establishing separate public schools for black and white students to be unconstitutional.

Educational Facilities

Buildings and environments, including schools, colleges, universities, and training centers, specifically designed for teaching and learning purposes.