Question

Division A makes a part with the following characteristics:

Production capacity in units		33,500	units
Selling price to outside customers	$	22
Variable cost per unit	$	15
Total fixed costs	$	103,100

Division B, another division of the same company, would like to purchase 13,500 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $19 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 agrees to sell the parts to Division B at $19 per unit, the company as a whole will be:

Multiple Choice

• a. worse off by $40,500 each period.

• b. worse off by $81,000 each period.

• c. better off by $40,500 each period.

• d. There will be no change in the status of the company as a whole.

Answer 1

Total units transferred to Division B	13500
X Contribution margin lost per unit	7	=22-15
Total Contribution margin lost	94500
Savings in cost due internal transfer	54000	=13500*(19-15)
Less: Total Contribution margin lost	-94500
Net change in income	-40500
The company as a whole will be worse off by $40,500 each period.
Option A is correct