Division a Makes a Part with the Following Characteristics

question 20

Multiple Choice

Division A makes a part with the following characteristics:


Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $28 each.
-Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the $28 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:

• A)worse off by $40,000 each period.
• B)worse off by $20,000 each period.
• C)better off by $10,000 each period.
• D)worse off by $30,000 each perioD.Because there is ample excess capacity, there is no opportunity cost.Instead of incurring a cost of $20 per unit if the transfer were made internally, the company would have to incur a cost of $28 per unit to purchase from an outside supplier.Therefore, the company would be worse off by $40,000 per period = ($28 per unit - $20 per unit) × 5,000 units per period.

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Definitions:

Forecasts of Earnings

Projections or estimates about a company's future profitability, typically made by financial analysts or the company's management.

Due Diligence Defense

A legal defense in which the accused shows that they took all possible precautions and conducted thorough research or investigation before making a decision.

Registration Statement

A set of documents submitted to a regulatory authority, detailing the specifics of a security offering to the public.

Prospectus

An official document that a company files with the SEC that provides details about an investment offering for sale to the public.