The Table and Chair Divisions Are Part of the Same

question 174

Multiple Choice

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: $$\begin{array} { l l } \text { Direct materials } & \$ 136 \\\text { Direct labor } & 200 \\\text { Variable overhead } & 40 \\\text { Fixed overhead } & 42\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Chair continue to buy from Table or start to buy from the outside supplier?

• A) Chair should buy from an outside supplier.
• B) Chair should buy from Table Division because the company's profit would be $58.00 per unit larger.
• C) Chair should buy from Table Division because the company's profit would be $32.00 per unit larger.
• D) None of these answers is correct.

Recognize the characteristics and implications of different ownership structures on liability and income distribution.

Understand the principal-agent problem and its impact on corporate governance and executive compensation.

Learn about the conditions facilitating the ease of raising equity capital for various business structures.

Understand the impact of the U.S. tax system on the purchase and provision of health insurance.

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Definitions:

Accounts Receivable

Money owed to a company by its customers for products or services that have been delivered but not yet paid for.

Accounts Receivable Balance

The total amount of money owed to a company by its customers for goods or services sold on credit.

Accounts Payable Balance

The total amount owed by a company to its suppliers or creditors for items or services purchased on credit.

Raw Materials Purchases

The total cost or expenditure associated with buying raw materials that will be used in producing goods.