Division X makes a part with the following characteristics: Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each.
-Suppose that Division X is operating at capacity and can sell all of its output to outside customers.If Division X sells the parts to Division Y at $17 per unit,the company as a whole will be:
A)better off by $10,000 each period.
B)worse off by $20,000 each period.
C)worse off by $10,000 each period.
D)There will be no change in the status of the company as a whole.

Question

Division X makes a part with the following characteristics:  Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each.
-Suppose that Division X is operating at capacity and can sell all of its output to outside customers.If Division X sells the parts to Division Y at $17 per unit,the company as a whole will be:
A)better off by $10,000 each period. 
B)worse off by $20,000 each period. 
C)worse off by $10,000 each period. 
D)There will be no change in the status of the company as a whole.

Quizplus · Accepted Answer

Instead of being able to sell the units for $18 per unit on the outside market,the company would save $17 per unit transferring them internally.The net effect is a reduction of $10,000 per period = ($18 per unit - $17 per unit)F1F1F1S1F1F1F10 10,000 units per perio

Division X Makes a Part with the Following Characteristics