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MC Question 8
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?
A. Increase of $65,000
B. Decrease of $78,000
C. Decrease of $88,000
D. Increase of $55,000