Division a Makes a Part with the Following Characteristics Division B, Another Division of the Same Company, Would Like

question 195

Multiple Choice

Division A makes a part with the following characteristics:
$\begin{array}{|l|r|}\hline \text { Production Capacity in Units } & 15,000 \text { units } \\\hline \text { Selling Price to Outside Customers } & \$ 25 \\\hline \text { Variable Cost per Unit } & \$ 18 \\\hline \text { Total Fixed Costs } & \$ 60,000 \\\hline\end{array}$
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 is operating at capacity and can sell all of its output to outside customers at its usual selling price.If Division A sells the parts to Division B at $24 per unit (Division B's outside price) ,what will be the effect on the operating income of company as a whole?

• A) Higher by $5,000 each period.
• B) Lower by $15,000 each period.
• C) Lower by $5,000 each period.
• D) There will be no change in the status of the company as a whole.

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Definitions:

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