Division a Makes a Part with the Following Characteristics

question 11

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 $24 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 B continues to purchase parts from an outside supplier rather than from Division A,the company as a whole will be:

• A)worse off by $30,000 each period.
• B)worse off by $10,000 each period.
• C)better off by $15,000 each period.
• D)worse off by $35,000 each perioD.Purchasing from outside supplier costs $6 more than producing internally would ($24 - $18).The total for all 5,000 parts is $6*5,000 = $30,000.Therefore,if the company continues to purchase from the outside supplier,it will be $30,000 worse off.

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