A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: $$\begin{array} { | l | r | l | }
\hline \text { X's variable cost per unit } & \$ 40 & \
\hline \text { X's fixed costs } & \$ 100,000 & \
\hline \text { X's annual sales to Y } & 5,000 & \text { units } \
\hline \text { X's sales to outsiders } & 10,000 & \text { units } \
\hline
\end{array}$$ X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?
A) Outside vendors.
B) Division X, but only at the variable cost per unit.
C) Division X, but only until fixed costs are covered, then should purchase from outside vendors.
D) Division X, in spite of the increased transfer price.
E) It is not possible to tell without additional information.

Question

A company has two divisions, X and Y, each operated as an investment center.X charges Y $55 per unit for each unit transferred to Y.Other data are: $$\begin{array} { | l | r | l | } 
\hline \text { X's variable cost per unit } & \$ 40 & \
\hline \text { X's fixed costs } & \$ 100,000 & \
\hline \text { X's annual sales to Y } & 5,000 & \text { units } \
\hline \text { X's sales to outsiders } & 10,000 & \text { units } \
\hline
\end{array}$$ X is planning to raise its transfer price to $65 per unit. Division Y can purchase units at $50 each from outsiders, but doing so would idle X's facilities now committed to producing units for Y. Division X cannot increase its sales to outsiders. From the perspective of the short-term profit position of the company as a whole, from which source should Division Y acquire the units?
A) Outside vendors.
B) Division X, but only at the variable cost per unit.
C) Division X, but only until fixed costs are covered, then should purchase from outside vendors.
D) Division X, in spite of the increased transfer price.
E) It is not possible to tell without additional information.

Quizplus · Accepted Answer

Purchasing from Division X, even at the increased transfer price, keeps the production within the company, ensuring that the internal resources are utilized and the company's overall profit margin is maintained or improved. Buying from outside at $50 per unit might seem cheaper, but it would idle X's facilities, potentially increasing the overall costs when considering the fixed costs and the lost contribution margin from internal transfers.

A Company Has Two Divisions, X and Y, Each Operated