Montreal Corporation has two divisions, Longueuil and Verdun, and evaluates management on the basis of return on investment. Longueuil currently makes a part that it sells to both Verdun and outsiders. Selected data follow. $\begin{array} { | l | r | }
\hline \text { Selling price to Verdun } & \$ \
\hline \text { Variable cost } & 18 \
\hline \text { Fixed costs } & 80,000 \
\hline
\end{array}$ Longueuil is seeking an increase in its selling price to $28 per unit because of rising costs. Verdun can obtain comparable units from an outside supplier for $23; however, if Verdun uses the supplier, Longueuil will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Montreal Corporation.

Question

Montreal Corporation has two divisions, Longueuil and Verdun, and evaluates management on the basis of return on investment. Longueuil currently makes a part that it sells to both Verdun and outsiders. Selected data follow. $\begin{array} { | l | r | } 
\hline \text { Selling price to Verdun } & \$ \
\hline \text { Variable cost } & 18 \
\hline \text { Fixed costs } & 80,000 \
\hline
\end{array}$ Longueuil is seeking an increase in its selling price to $28 per unit because of rising costs. Verdun can obtain comparable units from an outside supplier for $23; however, if Verdun uses the supplier, Longueuil will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Montreal Corporation.

Quizplus · Accepted Answer

Longueuil's variable cost per unit is $18, which is less than the $23 Verdun would pay an outside supplier. Therefore, from the perspective of Montreal Corporation, it is beneficial for Verdun to continue purchasing from Longueuil to avoid idle capacity and maintain internal profitability.

Montreal Corporation Has Two Divisions, Longueuil and Verdun, and Evaluates