Division A makes a part with the following characteristics: Production capacity in units.................. 15,000 units Selling price to outside customers....... P30 Variable cost per unit............................. P20 Fixed cost per unit.................................. P4 Total fixed costs...................................... P60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of P 28 each. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the P28 price internally, the company as a whole will be: A) worse off by P40,000 each period B) worse off by P20,000 each period. C) better off by P10,000 each period D) worse off by P30,000 each period. 2. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at P28 per unit (Division B's outside price), the company as a whole will be: A) better off by P20,000 each period. B) worse off by P10,000 each period. C) worse off by P40,000 each period. D) There will be no change in the status of the company as a whole. Explain and show solutions if any. Thank you

In the case of inter-departmental transfers, we should assess the impact at the company level.

Answered: Division A makes a part with the following characteristics: Production capacity in units.................. 15,000 units Selling price to outside…

FINANCIAL ACCOUNTING

10th Edition

ISBN: 9781259964947

Author: Libby

Publisher: MCG

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Question

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Division A makes a part with the following characteristics:

	Production capacity in units..................	15,000 units
	Selling price to outside customers.......	P30
	Variable cost per unit.............................	P20
	Fixed cost per unit..................................	P4
	Total fixed costs......................................	P60,000

Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of P 28 each.

Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the P28 price internally, the company as a whole will be:
A) worse off by P40,000 each period
B) worse off by P20,000 each period.
C) better off by P10,000 each period
D) worse off by P30,000 each period.

2. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at P28 per unit (Division B's outside price), the company as a whole will be:

A) better off by P20,000 each period.

B) worse off by P10,000 each period.

C) worse off by P40,000 each period.

D) There will be no change in the status of the company as a whole.

Explain and show solutions if any. Thank you

Expert Solution