Clariton Corporation has two divisions, Kissimmee and Grant, and evaluates management on the basis of return on investment. Kissimmee currently makes a part that it sells to both Grant and outsiders. Selected data follow.

Selling price to Grant	$	25
Variable cost		18
Fixed costs		80,000

Kissimmee is seeking an increase in its selling price to $28 per unit because of rising costs. Grant can obtain comparable units from an outside supplier for $26; however, if Grant uses the supplier, Kissimmee will have idle capacity because of an inability to increase sales to outsiders. From the perspective of Clariton Corporation:

Multiple Choice

A. Kissimmee should continue to do business with Grant and charge $28 per unit.

B. Kissimmee should continue to do business with Grant and charge $25 per unit.

C. Kissimmee should continue to do business with Grant because Kissimmee’s variable cost per unit is only $18.

D. Grant should do business with the outside supplier.

E. Grant should split its business between Kissimmee and the outside supplier.

Answer rating: 100% (QA)

C Kissimmee should continue to do business with Grant because Kissi... View the full answer