Given the following data for Division X: Division Y would like to purchase 23,50

ID: 2472779 • Letter: G

Question

Given the following data for Division X:

Division Y would like to purchase 23,500 units each period from Division X. Division X has ample excess capacity to handle all of Division Y's needs. Division Y now purchases from an outside supplier at a price of $28.5. If Division X refuses to accept an $26.5 price internally, the company, as a whole, will be worse off by:

A. $41,125

B. $317,250

C. $88,125

D. $405,375

Selling price to outside customers $ 42 Variable cost per unit 24.75 Fixed cost - Total 80,000 Capacity (in units) 80,000

Explanation / Answer

Calculation of Loss to company if Division X refuses to accept the offer from Division Y:

Purchase cost for Division Y from outside supplier = (23500 Units *$28.50)

$ 669,750

Relevant cost for Division X of supply to Division Y:

Variable cost (23500 Units *$24.75)

$ (581,625)

Loss to company

$ 88,125