A Company Has Two Divisions, X and Y, Each Operated

question 143

Multiple Choice

A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: $$\begin{array} { | l | r | l | } \hline \text { X's variable cost per unit } & \$ 40 & \\\hline \text { X's fixed costs } & \$ 100,000 & \\\hline \text { X's annual sales to Y } & 5,000 & \text { units } \\\hline \text { X's sales to outsiders } & 10,000 & \text { units } \\\hline\end{array}$$ X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?

• A) Outside vendors.
• B) Division X, but only at the variable cost per unit.
• C) Division X, but only until fixed costs are covered, then should purchase from outside vendors.
• D) Division X, in spite of the increased transfer price.
• E) It is not possible to tell without additional information.

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