(Appendix 11A)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 B continues to purchase parts from an outside supplier rather than from Division A,what will be the effect on the operating income of the company as a whole?
A) Lower by $30,000 each period.
B) Lower by $10,000 each period.
C) Higher by $15,000 each period.
D) Lower by $35,000 each perioD.
(24 - 18)* 5,000 = $30,000 (Lower by $30,000 each period).

Question

Quizplus · Accepted Answer

If Division B continues to purchase parts from an outside supplier rather than from Division A, it would mean that Division A's idle capacity would not be utilized, resulting in a loss of $30,000 each period (calculated as (24-18)*5,000). Therefore, the operating income of the company as a whole would be lower by $30,000 each period, making option A the correct answer.

(Appendix 11A)Suppose That Division a Has Ample Idle Capacity to Handle