Division a Makes a Part with the Following Characteristics

question 12

Multiple Choice

Division A makes a part with the following characteristics:

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 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 B continues to purchase parts from an outside supplier rather than from Division A,what will be the effect on the operating income of the company as a whole?

• A) Lower by $30,000 each period.
• B) Lower by $10,000 each period.
• C) Higher by $15,000 each period.
• D) Lower by $35,000 each period.

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Definitions:

Present Value Tables

Tables that help in determining the present value of a future amount of money or stream of cash flows given a specific interest rate.

Issue Price

The issue price is the price at which securities, such as bonds or stocks, are sold to the public or initial investors during their first offering.

Bonds

Long-term debt securities issued by corporations, municipalities, or governments to finance operations, projects, or infrastructure, paying interest to investors.

Operating Lease

A lease agreement that allows a company to use an asset without ownership, where the lessor retains the risks and benefits of ownership.