Halifax & Smyth (H&S) is a clothier that specializes in expensive men's suits, and the firm makes the suits from wool fabrics that are woven by one of the firm's divisions. This division is not the only source for this material, and H&S could buy or sell wool fabric in the outside competitive market. H&S will buy some of the wool fabric that it needs for suits from the outside market if the:

A) market price is less than the optimal transfer price if the outside market did not exist.
B) market price is less than the point where the net marginal revenue of weaving wool fabric intersects the marginal cost of wool fabric.
C) market price is less than the point where the net marginal revenue of assembling men's suits intersects the marginal cost of assembly.
D) Both A and B are correct.

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Alexander Smith · Accepted Answer

Final Answer : D, Explanation :  H&S will buy wool fabric from the outside market if the market price is less than the optimal transfer price (A) and also less than the point where the net marginal revenue of weaving wool fabric intersects the marginal cost of wool fabric (B). By buying wool fabric at a price lower than the optimal transfer price and at a point where the marginal cost of wool fabric is lower than the net marginal revenue of weaving, H&S can save costs and increase profitability. Therefore, both A and B are correct.

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