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.
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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

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Definitions:

Step Acquisition

The process where a company gradually increases its investment in another company over time, potentially gaining control or significant influence.

Consolidated Income Statement

A Consolidated Income Statement is a financial report that combines the income, expenses, and profits of a parent company and its subsidiaries, showing the overall performance as a single entity.

Acquisition Method

The Acquisition Method is an accounting technique used in consolidating the financial statements of a group where one entity controls others.

Noncontrolling Interest

The share of ownership in a subsidiary that cannot be directly or indirectly linked to the parent company.