Question

Finch Company has two divisions, A and B. Division A manufactures 6,500 units of product per month. The cost per unit is calculated as follows.

Variable costs	$	7.10
Fixed costs		20.20
Total cost	$	27.30

Division B uses the product created by Division A. No outside market for Division A’s product exists. The fixed costs incurred by Division A are allocated headquarters-level facility-sustaining costs. The manager of Division A suggests that the product be transferred to Division B at a price of at least $27.30 per unit. The manager of Division B argues that the same product can be purchased from another company for $19.20 per unit and requests permission to do so.

Required

1. a-1. How much would the division gain or lose if Division B were to purchase the product from the outside company for $19.20 per unit? (Round your answer to 2 decimal places.)

2. a-2. Is it in the best interest of Finch Company for Division B to purchase the product from an outside company?

Answer 1

SOLUTION

A1. If division B purchase the product from outside market at a price $27.30 per unit it means division B's gain is $8.10 ($27.30 - $19.20) per unit.

Total Gain = $8.10 * 6,500 = $52,650

A2. No, it is not in the best interest of Finch Company for Division B to purchase the product from an outside company. In this way the company loses (19.20-7.10) * 6,500 = 78,650