Question

Division S of York Company makes a part and sells to other companies. Data on that part appear below:

Selling price on external market: $30 per unit

Variable costs per unit: $22 per unit

Fixed costs per unit (based on capacity): $7 per unit

Capacity in units: 50,000 units

Division B, another division of York Company, is currently purchasing 10,000 units of a similar product each period from an outside supplier for $28 per unit, but would like to begin purchasing from division S. Suppose division S has enough idle capacity to handle all of division B's needs without any increase in fixed costs or interfering with its sales to outside customers. If division S refuses to accept a transfer price of $28 or less and division B continues to buy from the outside supplier, the company as a whole will.

A. gain $20,000 in potential profit

B. lose $20,000 in potential profit

C. lose $70,000 in potential profit

D. lose $60,000 in potential profit

E. None of the above

Answer 1