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Relvant cost of making versus buying

James Co. has two divisions,A and B,each operate as a profit center.A charges B $35 per unit for each unit transferred to B. Other data for A are below:

Variable cost per unit $30
Fixed costs $10,000
Annual sales to B 5,000 units
Annual sales to outsiders 50,000 units

A is planning to raise its transfer price to $50 per unit .Division B can purchase units from outsiders for $40 each, but doing so would idle A's facilities that are now committed to producing units for B.Division A can't increase its sales to outsiders .From the perspective of the company as a whole ,from Whom should Division B acquire the units, assuming B's market is unaffected?

A.Outside vendors.

B.Division A,but only at the variable cost per unit.

C.Division A,but only until fixed costs are covered ,then from outside vendors.

D.Division A,despite the increased transfer price.

Slect the correct answer and why?

Solution Preview

James Co. has two divisions,A and B,each operate as a profit center.A charges B $35 per unit for each unit transferred to B. Other data for A are below:

Variable cost per unit $30
Fixed costs $10,000
Annual sales to B 5,000 units
Annual sales to outsiders 50,000 units

A is ...

Solution Summary

The response provides the steps to compute and compare the relevant cost of making versus buying.

$2.19