The Gear Division Makes a Part with the Following Characteristics

question 147

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 that the Gear Division is operating at capacity and can sell all of its output to outside customers. If the Gear Division sells the parts to Motor Division at $17 per unit, the company as a whole will be:

• A) better off by $10,000 each period.
• B) worse off by $20,000 each period.
• C) worse off by $10,000 each period.
• D) There will be no change in the status of the company as a whole.

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