(Appendix 11A) 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 has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers.If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier,the company as a whole will:
A) gain $20,000 in potential profit.
B) lose $60,000 in potential profit.
C) lose $70,000 in potential profit.
D) lose $20,000 in potential profit.

Question

(Appendix 11A) 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 has ample idle capacity to handle all of Division B's needs without any increase in fixed costs or cutting into sales to outside customers.If Division S refuses to accept a transfer price of $28 or less and Division B continues to buy from the outside supplier,the company as a whole will:
A) gain $20,000 in potential profit. 
B) lose $60,000 in potential profit. 
C) lose $70,000 in potential profit. 
D) lose $20,000 in potential profit.

Quizplus · Accepted Answer

11ea7761_1697_042c_81a5_9d43ee98ead8_TB2580_00 The cost would be higher by $60,000 if the units are purchased from an outside supplier rather than produced internally and transferred.

(Appendix 11A) Division S of Kracker Company Makes a Part