Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below: Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S.
Suppose that Division S has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will:
A) gain $20,000 in potential profit.
B) lose $60,000 in potential profit.
C) lose $70,000 in potential profit.
D) lose $20,000 in potential profit.

Question

Division S of Kracker Company makes a part that it sells to other companies. Data on that part appear below:  Division B, another division of Kracker Company, presently is purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from Division S.
Suppose that Division S has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers. If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier, the company as a whole will:
A) gain $20,000 in potential profit. 
B) lose $60,000 in potential profit. 
C) lose $70,000 in potential profit. 
D) lose $20,000 in potential profit.

Quizplus · Accepted Answer

11eacbfc_c7d1_e4dc_8ffe_c1e8ff4aadfa_TB7552_00 The cost would be higher by $60,000 if the units are purchased from an outside supplier rather than produced internally and transferred.

Division S of Kracker Company Makes a Part That It