Axis corporation has an engine division that manufactures engines. This division is currently producing 10000 engines per year with a capacity of 15000 The variable costs assigned to each engine are $300 and annual fixed costs of the division are $900000.The automobile division wants to buy 5000 engines at $280 for its internal consumption.The enginedivision manager refused the order because the price is below variable cost.The automobile division manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity thereby causing operations to be at their most efficient level.
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Should the order from the automobile division be accepted by the engine division? Why?
From the perspective of the engine division and the company should the order be accepted if the automobile division plans on selling the engines in the outside market for $420 after incurring additional costs of $100 per engine?