Question

Division X makes a part with the following characteristics Production capacity Selling price to outside customers Variable cost per unit Pixed cost, total 32,000 units $ 32 25 $107.000 Division Y of the same company would like to purchase 10,070 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $31 each. 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 $31 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:

Answer 1

WORKING NOTES:
	CALCULATION OF RELEVANT COST OF TRANSFER PRICE FROM DEPT. X TO DEPT. Y
		Variable Cost per unit for production =	$25
		Fixed Cost (Not relevant becaue no increase in fixed cost)	$0
		Total Relevant Cost	$25
SOLUTION:
		GAIN ON LOSSES ON NOT ACCEPT THE INTERNAL TRANSFER PRICE BY DEPT. X
		Purchase price from Outside	$31
		Less: Relevant Cost of Transfer Pricing	$25
		Loss per unit if purchase from outside	$6
		X by No. of units Purchases	10,070
		Loss per period	$60,420
ANSWER = OPTION 3 = Worse off by $ 60,420 each period