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

question 30

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 that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y 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:

Straight Bond Value

The value of a bond that pays a fixed interest rate and does not have any embedded options or features.

European Option

A type of options contract that can only be exercised at the expiration date, not before.

Expiration Date

The date on which a contractual agreement, option, or financial instrument becomes invalid or requires renewal.

Exercise Price

The predetermined price at which an option contract can be executed.