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

question 53

Multiple Choice

Division X makes a part with the following characteristics: $\begin{array}{lrr} \text { Production capacity. } &\text {25,000 units}\\ \text { Selling price to outside customers. } &£ 18\\ \text { Variable cost per unit.} &11\\ \text { Fixed cost, total. } &£ 100,000\\ \end{array}$

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)better off by £10,000 each period
• C)worse off by £60,000 each period
• D)worse off by £20,000 each period

---

Definitions:

Retained Earnings

The fraction of net earnings that is not allotted for dividends, but is retained by the company to reinvest in the core business activities or to pay off debts.

Annual Revenues

The total amount of money received by a company from its activities, such as sales of products or services, before any expenses are subtracted, within a fiscal year.

Expenses

The outflow of money to pay for goods, services, or assets, or the costs incurred in the operation of a business.

Dividends

Capital returned to shareholders by a company, often representing a share of the company's profits.