The Northern Division of CPP Corporation supplies parts to its Southern Division. These parts are also available in the market from other suppliers. Northern Division is operating at 80% capacity, with a variable cost per unit of $6. Because of a personality conflict between the two division managers, however, Southern has elected to buy the part from outside suppliers at $7 per unit. As a result of this action, CPP Corporation will be:
A) better off.
B) worse off.
C) forced to close Northern Division.
D) forced to close Southern Division.

Question

Quizplus · Accepted Answer

CPP Corporation will be worse off as the Southern Division is buying the parts from outside suppliers at a higher cost than the variable cost per unit of the Northern Division. This decision is not based on rational economic analysis, but rather on a personality conflict. This behavior negatively affects the overall profitability of the corporation. Closing either division is not a viable solution without analyzing the performance of each division and exploring other options to improve profitability.

The Northern Division of CPP Corporation Supplies Parts to Its