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The Selling Division's unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units.
-What is the Selling Division's opportunity cost per unit from selling 2,000 units to the Purchasing Division?
A) $10
B) $25
C) $4
D) $0

Question

Use the following information for questions 
The Selling Division's unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units.
-What is the Selling Division's opportunity cost per unit from selling 2,000 units to the Purchasing Division?
A) $10
B) $25
C) $4
D) $0

Quizplus · Accepted Answer

The Selling Division's opportunity cost per unit is zero because the division is not giving up any outside sales to sell to the Purchasing Division. Therefore, the division will earn an additional $9 per unit ($25 selling price - $15 variable cost - $1 fixed cost) by selling 2,000 units to the Purchasing Division, without incurring any opportunity cost.

The best choice(s) would be to sell the 2,000 units to the Purchasing Division because it will earn an additional profit of $18,000 ($9 profit per unit x 2,000 units) without incurring any opportunity cost. The division has excess capacity of 2,000 units (10,000 capacity - 8,000 outside sales), which can be sold to the Purchasing Division without affecting outside sales.

Use the Following Information for Questions