Question
Kelowna Company has two divisions, A and B. Division A manufactures 12,000 units of product per month. The cost per unit is calculated as follows.
Kelowna Company has two divisions, A and B. Division A manufactures 12,000 units of product per month. The cost per unit is calculated as follows.
Var Cost: $10
Fixed Cost: $20
Total Cost: $30
Division B uses the product created by Division A. No outside market for Division A's product exists. The fixed costs incurred by Division A are allocated headquarters-level facility-sustaining costs. The manager of Division A suggests that the product be transferred to Division B at a price of at least $30 per unit. The manager of Division B argues that the same product can be purchased from another company for $26 per unit and requests permission to do so.
- a-1.How much would the division gain or lose if Division B were to purchase the product from the outside company for $26 per unit?
- a-2.Is it in the best interest of Kelowna Company for Division B to purchase the product from an outside company?
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