The Ink and Paper Divisions Are Part of the Same

question 93

Multiple Choice

The Ink and Paper Divisions are part of the same company. Currently the Paper Division buys a part ingredient from Ink for $192. The Ink Division wants to increase the price of the part it sells to Paper by $48 to $240. The manager of Paper has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Paper can buy the part from an outside supplier for $224. The cost data for the Ink Division is as follows:
If Ink ceases to produce the parts for Paper, it will be able to avoid one-third of the fixed manufacturing overhead. The Ink Division has excess capacity but no alternative uses for its facilities.
-From the standpoint of the company as a whole, should Paper continue to buy from Ink or start to buy from the outside supplier?

• A) Buy from Ink Division, because the company's profit would be $29.60 per unit larger.
• B) Buy from Ink Division, because the company's profit would be $16.00 per unit larger.
• C) Buy from an outside supplier.
• D) None of the above.

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Definitions:

Human Capital

Human capital refers to the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.

Average Salaries

The mean income received by employees within a particular job, industry, or geographical area.

Compensating Differentials

Compensating Differentials are wage differences that arise between jobs due to the desirability of the job itself, including factors such as risk, work conditions, or location.

Systematic Discrimination

Processes and practices that lead to consistent and widespread unequal treatment of individuals based on race, gender, or other characteristics.