Division A makes a part with the following characteristics: Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each.
-Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B's outside price), the company as a whole will be:
A) better off by $5,000 each period.
B) worse off by $15,000 each period.
C) worse off by $5,000 each period.
D) There will be no change in the status of the company as a whole.

Question

Division A makes a part with the following characteristics:  Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 each.
-Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at $24 per unit (Division B's outside price), the company as a whole will be:
A) better off by $5,000 each period. 
B) worse off by $15,000 each period. 
C) worse off by $5,000 each period. 
D) There will be no change in the status of the company as a whole.

Quizplus · Accepted Answer

If Division A sells the parts to Division B at $24 per unit, it will be worse off by $5,000 each period as it would have earned its usual selling price from the outside customers. Division B will save $24 - $x on each unit, where x is Division A's usual selling price, and will be better off by $5,000 each period. Therefore, the company as a whole will be worse off by $5,000 each period.

Division a Makes a Part with the Following Characteristics