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 can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be:
A) worse off by $80,000 each period.
B) worse off by $70,000 each period.
C) better off by $20,000 each period.
D) worse off by $20,000 each period.

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 can sell all that it can produce to outside customers. If Division S sells to Division B at a price of $28 per unit, the company as a whole will be:
A) worse off by $80,000 each period. 
B) worse off by $70,000 each period. 
C) better off by $20,000 each period. 
D) worse off by $20,000 each period.

Quizplus · Accepted Answer

If Division S sells to Division B at a price of $28 per unit, Division B will save $28 - $22 = $6 per unit, but Division S will lose $22 - $18 = $4 per unit. Therefore, the company as a whole will be worse off by $6 x 10,000 - $4 x 10,000 = $20,000 each period. Thus, it is better for Division S to continue selling to outside customers at $22 per unit.

Division S of Kracker Company Makes a Part That It