Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $43, $26 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $58.The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (32,000 hinges) at a cost of $53. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 32,000 hinges it needs from the outside vendor for $53?a. No change in profit to Altoona.b. $160,000 increase in profits.c. $160,000 decrease in profits.d. $864,000 decrease in profits.

Answer 1

Answer:

d. $864,000 decrease in profits.

Explanation:

Hinge Division's total cost per unit:

variable $26

fixed $17

total $43

sales price $58

contribution margin $32

profit margin $15

                               Alternative A           Alternative B        Differential

                               intercompany          outside                 amount

money paid to                        $0            $1,696,000         ($1,696,000)

outside vendor

variable costs             $832,000                          $0             $832,000

fixed costs                  $544,000              $544,000                         $0

total costs                 $1,376,000          $2,240,000           ($864,000)

If the hinges are purchased form an outside vendor, the corporation's total profits will decrease by $864,000.