Noble Company has two divisions, A and B. Division A manufactures 5,600 units of product per month. The cost per unit is calculated as follows
|
Variable costs
|
$ 6.20
|
|
Fixed costs
|
20.60
|
|
Total cost
|
$ 26.80
|
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 $26.80 per unit. The manager of Division B argues that the same product can be purchased from another company for $18.40 per unit and requests permission to do so.
Required:
1. How much would the division gain or lose if Division B to purchase the product from the outside company for $18.40 per unit?
Is it in the best interest of Noble Company for Division B to purchase the product from an outside company?