New England Corporation Has Two Divisions, Providence and Buffalo, and Evaluates

question 71

Multiple Choice

New England Corporation has two divisions, Providence and Buffalo, and evaluates management on the basis of return on investment. Providence currently makes a part that it sells to both Buffalo and outsiders. Selected data follow. $\begin{array}{lr}\text { Selling price to Buffalo } & \$ 25 \\\text { Variable cost } & 18 \\\text { Fixed costs } & 80,000\end{array}$ Providence is seeking an increase in its selling price to $28 per unit because of rising costs. Buffalo can obtain comparable units from an outside supplier for $26; however, if Buffalo uses the supplier, Providence will have idle capacity because of an inability to increase sales to outsiders. From the perspective of New England Corporation:

• A) Providence should continue to do business with Buffalo and charge $28 per unit.
• B) Providence should continue to do business with Buffalo and charge $25 per unit.
• C) Providence should continue to do business with Buffalo because Providence's variable cost per unit is only $18.
• D) Buffalo should do business with the outside supplier.
• E) Buffalo should split its business between Providence and the outside supplier.

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Definitions:

Rigidity

The quality of being unable to bend or be forced out of shape, often used metaphorically to describe inflexible attitudes or beliefs.

Depression

A mental health disorder characterized by persistent feelings of sadness, loss, or anger that interfere with daily activities.

Ego Integrity Versus Despair

The final stage of Erik Erikson’s theory of psychosocial development, where older adults reflect on their life and either achieve a sense of fulfillment or experience regret.

Erikson

Refers to Erik Erikson, a psychologist known for his theory on the psychosocial development of humans, emphasizing stages throughout the lifespan.