The Santa Fe Manufacturing Company has two divisions in Kansas, the Holton Division and the Derby Division. Currently, Derby buys a part (10,000 units) from Holton for $16 per unit. Holton has purchased new equipment and wants to increase the price to Derby to $18 per unit. The controller of Derby claims that she cannot afford to go that high, as it will decrease the division’s profit to near

zero. Derby can buy the part from an outside supplier for $16 per unit. The incremental costs per unit that Santa Fe incurs to produce each unit are Holton’s variable costs of $12. Fixed costs per unit for Holton with the recent purchase of equipment are $5.


Holton has no alternative uses for its facilities. Should Derby continue to buy from Holton or buy from the external supplier?
answer choices

Company as a whole Buy from external supplier

Derby Division only Buy from external supplier

Company as a whole Buy from external supplier


Derby Division only Buy from Holton Division

Company as a whole Buy from Holton Division