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 A refuses to accept the $24 price internally and Division B continues to buy from the outside supplier, 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.

Question

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 A refuses to accept the $24 price internally and Division B continues to buy from the outside supplier, 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.

Quizplus · Accepted Answer

Because there is ample excess capacity, there is no opportunity cost. Instead of incurring a cost of $18 per unit if the transfer were made internally, the company would have to incur a cost of $24 per unit to purchase from an outside supplier. Therefore, the company would be worse off by $30,000 per period = ($24 per unit − $18 per unit) × 5,000 units per period

Division a Makes a Part with the Following Characteristics