Question

The Jupiter Division of Space, Inc. produces dilithium crystals. One-third of its output is sold to the Antari Division, and the remainder is sold externally. Jupiter’s estimated sales and cost data for the coming year are:


Assume that Jupiter cannot sell any additional crystals externally. If the Antari Division has an opportunity to buy from an outside supplier at $1.40 per crystal and Jupiter refuses to meet this price, the company as a whole will be:

A) 1250 better off

B) 3750 worse off

C) 6250 better off

D) 5,000 worse off

Answer 1

While deciding between In house transfer Vs outside supplier , only relevant costs should be considered.

Fixed costs are constant and will remain same whether transferred internally or bought from outside supplier.

Benefit(loss) of buying from outside supplier

= incremental cost saved-incremental cost

=$12,500* - $1.40*12500units

=$12,500-$17,500

= -$5,000

*incremental cost saved are variable cost which will not incur if bought from outside

$5,000 worse is the correct alternative

Answer D