The Engine Division of Magnificent Motor Corporation uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100 . The Carburetor Division of Magnificent Motor Corporation manufactures the exact type of carburetor that the Engine Division requires. The Carburetor Division is

Question

presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is: Variable production costs $70 Variable selling costs 10 All fixed costs 10 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally. Refer to Magnificent Motor Corporation. If the two divisions agree to transact with one another, corporate profits will
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.

Answer 1

C
Selling costs of $50,000 ($10/unit) will not be incurred.