Question

Division P of Launch Corporation has the capacity for making 78,500 wheel sets per year and regularly sells 63,500 each year on the outside market. The regular sales price is $135 per wheel set, and the variable production cost per unit is $93. Division Q of Launch Corporation currently buys 33,500 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $125 per wheel set. If Division Q were to buy the 33,500 wheel sets it needs annually from Division P at $115 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:

Answer 1

$295,000

Step-by-step explanation:

Calculation to determine what the change in annual net operating income for the company as a whole, compared to what it is currently, would be:

Price paid by Division Q for 33,500 wheel sets: $4,187,500

(33,500*$125 per)

Less: Cost for Division P to produce 33,500 wheel sets × $93 per wheel set ($3,115,500)

Less: Lost profit for Division P to cut back sales to the outside ($777,000)

[($135 per wheel set − $93 per wheel set) × ( 78,500 wheel-63,500-33,500=18,500wheel sets):

Change in net annual operating income for the company as a whole $295,000

($4,187,500-$3,115,500-$777,000)

Therefore the change in annual net operating income for the company as a whole, compared to what it is currently, would be:$295,000