Question

Division A makes a part with the following characteristics:

Production capacity in units		31,100	units
Selling price to outside customers	$	25
Variable cost per unit	$	19
Total fixed costs	$	107,200

Division B, another division of the same company, would like to purchase 16,500 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $22 each.

Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the $22 price internally and Division B continues to buy from the outside supplier, the company as a whole will be:

Answer 1

Since division A has ample idle capacity to handle all of Division B's needs,there will be no opportunity cost to division A.

If the internal transfer was agreed,Cost of production will be $ 19 (Variable cost)

However cost of purchasing from outside supplier is $ 22

Hence, loss to the company=16500*(22-19)=$ 49500

Company will be worse off by $49500 each period due to this arrangement

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