Division X Makes a Part with the Following Characteristics Division Y of the Same Company Would Like to Purchase

question 133

Multiple Choice

Division X makes a part with the following characteristics: $\begin{array} { l r c } \text { Production capacity } && 25,000 \text { units } \\\text { Selling price to outside customers } & \$ & 18 \\\text { Variable cost per unit } & \$ & 11 \\\text { Fixed cost, total } & \$ & 100,000\end{array}$
Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:

• A) worse off by $70,000 each period.
• B) worse off by $20,000 each period.
• C) better off by $10,000 each period.
• D) better off by $60,000 each period.
• E) worse off by $60,000 each period.

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