A division of a company has idle capacity and produces a part that has a variable cost of $52 per unit and a full (absorption) cost of $87. Another division of the same company uses such a part in one of its products and it can buy an identical part from an outside supplier for $81 per unit. The company will be worse off if the latter division decides to buy exclusively from the outside supplier than if the part is made inside the company and transferred from one division to the other.

Question

Quizplus · Accepted Answer

The company will be worse off because the internal transfer at the variable cost of $52 per unit is cheaper than purchasing from an outside supplier at $81 per unit, saving the company $29 per unit.

A Division of a Company Has Idle Capacity and Produces