Division X makes a part with the following characteristics:$\begin{array}{lrr}
\text { Production capacity. } &\text {25,000 units}\
\text { Selling price to outside customers. } &£ 18\
\text { Variable cost per unit.} &11\
\text { Fixed cost, total. } &£ 100,000\

\end{array}$

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 that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at £17 per unit, the company as a whole will be

Question

Division X makes a part with the following characteristics:$\begin{array}{lrr}
  \text { Production capacity. } &\text {25,000 units}\
 \text { Selling price to outside customers. } &£ 18\
 \text {  Variable cost per unit.} &11\
 \text { Fixed cost, total. } &£ 100,000\
  
\end{array}$

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 that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at £17 per unit, the company as a whole will be

Quizplus · Accepted Answer

If Division X sells the parts to Division Y at £17 per unit, it will lose out on the opportunity to sell to outside customers who are willing to pay a higher price of £20 per unit. Therefore, the company as a whole will be worse off by £10,000 each period because it will lose out on the extra £3 per unit for 10,000 units, which equals £30,000 in revenue.

Division X Makes a Part with the Following Characteristics Division Y of the Same Company Would Like to Purchase