Division a Makes a Part with the Following Characteristics

question 221

Multiple Choice

Division A makes a part with the following characteristics: Division B, another division of the same company, would like to purchase 16,100 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $19 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 $19 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:

• A) worse off by $89,800 each period.
• B) worse off by $10,100 each period.
• C) worse off by $64,400 each period.
• D) worse off by $12,800 each period.

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Definitions:

Long Run

A period of time in economics during which all factors of production and costs are variable, allowing companies to adjust all inputs.

Least-cost Production

A production method where the combination of resources used minimizes costs for a given output level, achieving productive efficiency.

Per Unit Costs

The average cost of production or delivery per individual unit, calculated by dividing total costs by the number of units produced or delivered.

Output Level

is the quantity of goods or services produced within a given period by a firm or economy.