A Company Has Two Divisions, Softwoods and Hardwoods, Each Operating

question 117

Multiple Choice

A company has two divisions, Softwoods and Hardwoods, each operating as a profit center. The Softwood Division charges the Hardwood Division $35 per unit for each unit transferred to the Hardwood Division. Other data for the Softwood Division are as follows:
$$\begin{array} { l c c } \text { Variable Cost per unit } & \$ 30 \\\text { Fixed Costs } & \$ 10,000 \\\text { Annual Sales to the Hardwood Division } & 5,000 \text { units } \\\text { Annual Sales to Outsiders } & 50,000 \text { units }\end{array}$$
The Softwood Division is planning to raise its transfer price to $50 per unit. The Hardwood Division can purchase units at $40 per unit from outsiders but doing so would idle the Softwood Division's facilities (now committed to producing units for the Hardwood Division) . The Softwood Division cannot increase its sales to outsiders. From the perspective of the company as a whole, from who should the Hardwood Division acquire the units, assuming the Hardwood Division's market is unaffected?

• A) Outside vendors.
• B) The Softwood Division, but only at the variable cost per unit.
• C) The Softwood Division, but only until fixed costs are covered, then should purchase from outside vendors.
• D) The Softwood Division, in spite of the increased transfer price.

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Definitions:

Present Value

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Interest Rate

Rate at which one can borrow or lend money.

Decline

A decrease in quantity, quality, or strength over a period, often observed in economic indicators, stock prices, or physical capacities.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.