The Gear Division Makes a Part with the Following Characteristics

question 125

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 the Gear Division has ample excess capacity to handle all of the Motor Division's needs without any increase in fixed costs and without cutting into sales to outside customers.If the Gear Division refuses to accept the $17 price internally and the Motor Division continues to buy from the outside supplier,the company as a whole will be:

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

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Definitions:

Urbanization

Urbanization is the process by which towns and cities are formed and become larger as more people begin living and working in central areas.

Stream Discharge

A term indicating the quantity of water flowing in a stream or river at any given location and time, expressed typically in volume per time unit.

Hydrograph

An illustration depicting the relationship between flow rate and time at a defined spot in a river or another type of conduit that transports flow.

Data Period

A data period is a specific span of time during which data is collected, analyzed, or reported for the purpose of study or analysis.