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Hi John!
Oxco has two divisions, A and B. Division A makes a component for air conditioning units
which it can only sell to Division B. It has no other outlet for sales.
Current information relating to Division A is as follows:
Marginal cost per unit $100
Transfer price of the component $165
Total production and sales of the component each year 2,200 units
Specific fixed costs of Division A per year $10,000
Cold Co has offered to sell the component to Division B for $140 per unit. If Division B
accepts this offer, Division A will be shut.
If Division B accepts Cold Co’s offer, what will be the impact on profits per year for the
group as a whole?1. The answer is Decrease of $78,000.
2. How to obtain the answer?
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