The Lock Division of Morgantown Corporation sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Morgantown's overall profit if the Lock Division agrees to sell to the Cabinet Division at the outside supplier's price and the Cabinet Division continues to buy inside?
A) No change in Morgantown's profits.
B) $140,000 decrease in Morgantown's profits.
C) $80,000 decrease in Morgantown's profits.
D) $40,000 increase in Morgantown's profits.

Question

Quizplus · Accepted Answer

If the Lock Division sells to the Cabinet Division at the outside supplier's price, the Lock Division will lose $4 per unit on the 10,000 units sold to the Cabinet Division. However, the Cabinet Division will save $4 per unit on the 10,000 units purchased from the Lock Division. Therefore, there will be no change in Morgantown's overall profit.

The Lock Division of Morgantown Corporation Sells 80,000 Units of Part