Question

Munoz Company has two divisions, A and B. Division A manufactures 6,200 units of product per month. The cost per unit is calculated as follows.

Variable costs	$	7.40
Fixed costs		19.50
Total cost	$	26.90

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 $26.90 per unit. The manager of Division B argues that the same product can be purchased from another company for $19.40 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 $19.40 per unit? (Round your answer to 2 decimal places.)

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

Answer 1