The Pen and Pencil Divisions Are Part of the Same

question 79

Multiple Choice

The Pen and Pencil Divisions are part of the same company. Currently the Pencil Division buys a part ingredient from Pen for $96. The Pen Division wants to increase the price of the part it sells to Pencil by $24 to $120. The manager of Pencil has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Pencil can buy the part from an outside supplier for $112. The cost data for the Pen Division is as follows:
If Pen ceases to produce the parts for Pencil, it will be able to avoid one-third of the fixed manufacturing overhead. The Pen Division has excess capacity but no alternative uses for its facilities.
-From the standpoint of the company as a whole, should Pencil continue to buy from Pen or start to buy from the outside supplier?

• A) Buy from Pen Division, because the company's profit would be $14.80 per unit larger.
• B) Buy from Pen Division, because the company's profit would be $8.00 per unit larger.
• C) Buy from an outside supplier.
• D) None of the above.

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Definitions:

Perpetual Life

The concept that an entity, usually a corporation, continues to exist indefinitely until it is legally dissolved, regardless of changes in ownership or management.

Limited Liability

A legal structure where a company's owners are protected from losing more money than they have invested in the company.

Interest Rate

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

Capacity Utilization

A metric used to measure the rate at which potential output levels are being met or used in the production process.