Division A makes a part with the following characteristics:

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 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 B continues to purchase parts from an outside supplier rather than from Division A,what will be the effect on the operating income of the company as a whole?
A) Lower by $30,000 each period.
B) Lower by $10,000 each period.
C) Higher by $15,000 each period.
D) Lower by $35,000 each period.

Question

Division A makes a part with the following characteristics:

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of $24 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 B continues to purchase parts from an outside supplier rather than from Division A,what will be the effect on the operating income of the company as a whole?
A) Lower by $30,000 each period. 
B) Lower by $10,000 each period. 
C) Higher by $15,000 each period. 
D) Lower by $35,000 each period.

Quizplus · Accepted Answer

If Division B purchases from an outside supplier instead of Division A, the company loses the opportunity to utilize idle capacity, resulting in a lower operating income by $30,000 each period.

Division a Makes a Part with the Following Characteristics