Chipper Division of Acme Corp.sells 80,000 units of part Z-25 to the outside market.Part Z-25 sells for $40,has a variable cost of $22,and a fixed cost per unit of $10.Chipper has a capacity to produce 100,000 units per period.Jones Division currently purchases 10,000 units of part Z-25 from Chipper for $40.Jones has been approached by an outside supplier willing to supply the parts for $36.What is the effect on Acme's overall profit if Chipper REFUSES the outside price and Jones decides to buy outside?
A)no change
B)$140,000 decrease in Acme profits
C)$80,000 decrease in Acme profits
D)$40,000 increase in Acme profits

Question

Quizplus · Accepted Answer

If Chipper refuses the outside price, Jones will buy from the outside supplier. This will result in a loss of 10,000 units of sales for Chipper, which will reduce its profit by $140,000 (10,000 units x $14 per unit).