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:

Holding Cost

The expenses associated with storing inventory that is not yet sold or utilized, including storage, insurance, and obsolescence costs.

Annual Demand

The total quantity of a product or service that is demanded over the course of a year.

Salvage Value

The estimated resale value of an asset at the end of its useful life.

Service Level

A measure of performance that represents the percentage of customer demands that are met without delay.