Question

Cabinet Division would like to purchase 11,900 units from the Handle Division at a price of $130 per unit. Handle Division has no excess capacity to handle the Cabinet Division's requirements. The Cabinet Division currently purchases from an outside supplier at a price of $140. If the Handle Division accepts a $130 price internally, the company, as a whole, will be better or worse off by:

Answer 1

Missing information:

Selling price to outside customers $155  

Variable cost per unit $70  

Fixed cost per unit (based on capacity) $40  

Capacity (in units) 62,000

Answer:

the company as a whole will be worse off by $178,500

Explanation:

since the Handle Division has no spare capacity to handle the order from Cabinet Division, it must treat this order as any common sale to an outside client.

                                  outside               Cabinet           differential

                                  customers          Division           amount

sales revenue           $1,844,500         $1,547,000      ($297,500)

variable costs             $833,000           $833,000                    $0

fixed costs                  $476,000           $476,000                    $0

total                                                                                ($297,500)

Handle Division will be worse off by $297,500

Cabinet Division will be better off by = ($140 - $130) x 11,900 = $119,000

net effect on the company = worse off by $178,500