Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:
A)worse off by $70,000 each period.
B)better off by $10,000 each period.
C)worse off by $60,000 each period.
D)worse off by $20,000 each perioD.Instead of incurring a cost of $11 per unit, the company would have to incur a cost of $17 per unit to purchase from an outside supplier.Therefore, the company would be worse off by $60,000 per period = ($17 per unit - $11 per unit) × 10,000 units per period

Question

Quizplus · Accepted Answer

Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs, therefore, they have no additional costs to bear by accepting the $17 price internally. If Division X refuses to do so, the company would have to incur a cost of $17 per unit to purchase from an outside supplier, which is $6 more than the internal price of $11. With 10,000 units per period, the company would be worse off by $60,000 per period = ($17 per unit - $11 per unit) × 10,000 units per period. Thus, the company as a whole will be worse off by $60,000 each period.

Suppose Division X Has Ample Excess Capacity to Handle All