The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: $$\begin{array} { l l }
\text { Direct materials } & \$ 136 \
\text { Direct labor } & 200 \
\text { Variable overhead } & 40 \
\text { Fixed overhead } & 42
\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Chair continue to buy from Table or start to buy from the outside supplier?
A) Chair should buy from an outside supplier.
B) Chair should buy from Table Division because the company's profit would be $58.00 per unit larger.
C) Chair should buy from Table Division because the company's profit would be $32.00 per unit larger.
D) None of these answers is correct.

Question

The Table and Chair Divisions are part of the same company. Currently the Chair Division buys a part from Table for $384. The Table Division wants to increase the price of the part it sells to Chair by $96 to $480. The manager of Chair has stated that it cannot afford to go that high, as it will decrease the division's profit to near zero. Chair can buy the part from an outside supplier for $448. The cost data for the Table Division is as follows: $$\begin{array} { l l } 
\text { Direct materials } & \$ 136 \
\text { Direct labor } & 200 \
\text { Variable overhead } & 40 \
\text { Fixed overhead } & 42
\end{array}$$ If Table ceases to produce the parts for Chair, it will be able to avoid one- third of the fixed manufacturing overhead. The Table Division has excess capacity but no alternative uses for its facilities. From the standpoint of the company as a whole, should Chair continue to buy from Table or start to buy from the outside supplier?
A) Chair should buy from an outside supplier.
B) Chair should buy from Table Division because the company's profit would be $58.00 per unit larger.
C) Chair should buy from Table Division because the company's profit would be $32.00 per unit larger.
D) None of these answers is correct.

Quizplus · Accepted Answer

If Chair buys from the outside supplier, the company's profit will be $32.00 per unit less than if Chair buys from Table. However, if Table ceases to produce the parts for Chair, it will be able to avoid one-third of the fixed manufacturing overhead, which is $14.00 per unit. Therefore, the company's profit will be $58.00 per unit larger if Chair buys from Table.

The Table and Chair Divisions Are Part of the Same