Fyodor Corporation Has a Parts Division That Does Work for Other

question 24

Multiple Choice

Fyodor Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machine Division has asked the Parts Division to provide it with 8,000 special parts each year. The special parts would require £19.00 per unit in variable production costs.
The Machine Division has a bid from an outside supplier for the special parts at £27.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the QR4 that it presently is producing. The QR4 sells for £34.00 per unit, and requires £18.00 per unit in variable production costs. Packaging and shipping costs of the QR4 are £2.00 per unit. Packaging and shipping costs for the new special part would be only £0.50 per unit. The Parts Division is now producing and selling 40,000 units of the QR4 each year. Production and sales of the QR4 would drop by 5% if the new special part is produced for the Machine Division.
-The opportunity cost for the Parts Division is

• A)£9.50
• B)£2.50
• C)£3.50
• D)£1

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Definitions:

Price Discrimination

A pricing approach where a single provider charges different prices for essentially the same products or services in different markets.

Consumer Surplus

The variance between what consumers are ready and capable of paying for a product or service versus what they actually end up paying.

Airlines

Entities that deliver passenger and freight transportation via air.

Short Run

A period in which at least one factor of production is fixed and cannot be changed, influencing production and cost.