If Green Division is operating at full capacity, it will have an opportunity cost for lost sales as another cost that would need to be covered by the internal order. The opportunity cost would be the contribution margin that the lost sales would have provided. Green Division would not accept the sale to Red Division because doing so would cause Green Division's profits to decrease.
The problem does not say whether the Green Division is operating at capacity or whether it has excess capacity adequate to produce the internal order. This answer choice would be correct only if Green Division has excess capacity. If Green Division does not have excess capacity, we need to include the opportunity cost of lost sales as another cost that needs to be covered by the internal order. Since we don't know the status of Green Division's capacity, we cannot state that the corporate policy would encourage this action from Green.
The problem does not say whether the Green Division is operating at capacity or whether it has excess capacity adequate to produce the internal order. This answer choice would be correct only if Green Division is operating at capacity and thus would have an opportunity cost to accept the internal order. Since we don't know the status of Green Division's capacity, we cannot state that the corporate policy would encourage this action from Green.
If the Green Division does not have to give up any external sales in order to produce the order for Red Division, it will sell the product to the Red Division at the company's internal sales price of cost plus 10%, even though the markup on the sale will not be as great as that of a sale to an external customer would be. Since the Green Division does not have an external customer to use the excess capacity, the internal sale will add to Green Division's operating income. Green Division's operating income will be higher under the circumstances if it accepts the internal sale at the lower profit margin than if it turns it down.
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