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Division Y of the same company would like to purchase 10,075 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $32 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 $32 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be?

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jepessoa

Answer:

Unless division X's variable cost of production per unit is higher than $32, which I doubt, then the company is losing money. Division X is not working at full capacity so they have spare capacity to provide the 10,075 units that division Y needs. Obviously the outside supplier is making money when it sells its product at $32, so this scenario is not logical.

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