Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-The profit foregone by the seller if the products or services are transferred internally instead of selling them externally are called
A)additional costs.
B)opportunity costs.
C)outlay costs.
D)transfer costs.
E)variable costs.

Question

Quizplus · Accepted Answer

The profit foregone by the seller if the products or services are transferred internally instead of selling them externally is called opportunity cost. In this case, the Production Division is losing the opportunity to sell the cushion stuffing externally at the higher price of $40 per kilogram if the Assembly Division decides to purchase it internally. The variable cost and fixed cost information provided by the Production Division manager is meant to argue for internal sales, but does not affect the concept of opportunity cost.

Use the Information Below to Answer the Following Question(s)