Question

Division X makes a part with the following characteristics:

Production capacity 25,000 units
Selling price to outside customers $ 18
Variable cost per unit $ 11
Fixed cost, total $ 100,000

Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers.

If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:

Answer 1

Answer:

Amount to be lost= $60,000

Explanation:

The  Division X is operating at less than full capacity, hence it has excess capacity

This implies that it can produce enough to meet both the internal  and external buyers. In this situation, the minimum transfer will be

minimum transfer price= Variable cost= $11

If Division X refuses to accept $17, the company has a whole will lose

amount paid by Division Y to the external supplier in excess of $11 .

Amount to be lost = (17-11)× 10,000

                               = $60,000