The Gear Division Makes a Part with the Following Characteristics

question 8

Multiple Choice

The Gear Division makes a part with the following characteristics:
$$\begin{array} { | l | r | } \hline \text { Production capacity } & 25,000 \text { units } \\\hline \text { Selling price to outside customers } & \$ 18 \\\hline \text { Variable cost per unit } & \$ 11 \\\hline \text { Fixed cost, total } & \$ 100,000 \\\hline\end{array}$$ Motor Division of the same company would like to purchase 10,000 units each period from the Gear Division.The Motor Division now purchases the part from an outside supplier at a price of $17 each.Suppose that the Gear Division is operating at capacity and can sell all of its output to outside customers.If the Gear Division sells the parts to Motor Division at $17 per unit,the company as a whole will be:

• A) better off by $10,000 each period.
• B) worse off by $20,000 each period.
• C) worse off by $10,000 each period.
• D) There will be no change in the status of the company as a whole.

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Definitions:

Residual Income

The amount of income that an individual or company retains after accounting for all operating expenses and costs, including debt.

Average Operating Assets

The average value of assets used in the daily operation of a business, calculated over a specific period.

Net Operating Income

The income a company makes from its regular business activities, not including costs related to interest and taxes.

Net Operating Income

A measure of a company's profitability that calculates how much revenue exceeds operating expenses, not including taxes and interest expenses.