Question
Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it
Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow.
Selling price to Grant | $ | 33 | |
Variable cost | 25 | ||
Fixed costs | 88,000 | ||
Kissimmee is seeking an increase in its selling price to $36 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $34; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:
Multiple Choice
A) Kissimmee should continue to do business with Grant and charge $36 per unit.
B) Kissimmee should continue to do business with Grant and charge $33 per unit.
C) Kissimmee should continue to do business with Grant because Kissimmees variable cost per unit is only $25.
D) Grant should do business with the outside supplier.
E) Grant should split its business between Kissimmee and the outside supplier.
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