The West and East Divisions Are Part of the Same

question 46

Multiple Choice

The West and East Divisions are part of the same company.Currently the East Division buys a part from West Division for $384 per unit.The West Division wants to increase the price of the part it sells to East Division by $96 to $480.The manager of the East Division has stated that he cannot pay that much insofar as the division's profit goes below zero.The manager of the East Division can buy the part from an outside supplier for $448 per unit.The cost data pertaining to the part is supplied by the West Division: If West Division does not produce the parts for the East Division,it will be able to avoid one-third of the fixed manufacturing overhead costs.The West Division has excess capacity but no alternative uses for the facilities.From the standpoint of the company as a whole,should the East Division buy the part from the West Division or the outside supplier?

• A)East Division should buy the part from the West Division because the Company's profit will be $14.00 per unit larger.
• B)East Division should buy the part from the West Division because the company's profit will be $32.00 per unit larger.
• C)East Division should buy the part from the West Division because the company's profit will be $58.00 per unit larger.
• D)East Division should buy from an outside supplier.

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Definitions:

Market Value

The current price at which an asset or service can be bought or sold in the open market.

Equity

The value of an ownership interest in a company, calculated as the company's assets minus its liabilities.

Debt

An amount of money borrowed by one party from another, usually with the condition of repayment with interest.

Put Contract

A financial contract granting the owner the privilege to sell a certain asset at a predetermined price during a set period.