Division X makes a part with the following characteristics: 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 Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers.If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier,the company as a whole will be:
A)worse off by $70,000 each period.
B)better off by $10,000 each period.
C)worse off by $60,000 each period.
D)worse off by $20,000 each period.
E)better off by $60,000 each period.

Question

Division X makes a part with the following characteristics:  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 Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers.If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier,the company as a whole will be:
A)worse off by $70,000 each period. 
B)better off by $10,000 each period. 
C)worse off by $60,000 each period. 
D)worse off by $20,000 each period. 
E)better off by $60,000 each period.

Quizplus · Accepted Answer

Instead of incurring a cost of $11 per unit, the company would have to incur a cost of $17 per unit to purchase from an outside supplier. Therefore, the company would be worse off by $60,000 per period = ($17 per unit - $11 per unit) * 10,000 units per period.

Division X Makes a Part with the Following Characteristics