Question

Lock Division of Morgantown Corp. sells 80,000 units of part Z-25 to the outside market. Part Z-25 sells for $40, has a variable cost of $22, and a fixed cost per unit of $10. The Lock Division has a capacity to produce 100,000 units per period. The Cabinet Division currently purchases 10,000 units of part Z-25 from the Lock Division for $40. The Cabinet Division has been approached by an outside supplier willing to supply the parts for $36. What is the effect on Morgantown's overall profit if the Lock Divisi

Answer 1

Answer:

The effect on Morgantown's overall profit is $140,000 decrease in Morgantown's profits

Explanation:

In order to calculate the effect on Morgantown's overall profit we would have to make the following calculations:

Contribution margin per unit for Lock Division = Selling price – Variable costs = $40 - $22 = $18

Contribution lost by lock division if Cabinet division buys from outside = $18 * 10,000 = $180,000

Cost per unit saved by Cabinet division = $40 - $36 = $4

Total cost saved by cabinet division = $4 * 10,000 = $40,000

Net decrease in profit = Contribution lost – Cost saved = $180,000 - $40,000 = $140,000

Therefore, the effect on Morgantown's overall profit is $140,000 decrease in Morgantown's profits.