Question

The West Division of National Company is buying 10,000 ventilators from an outside supplier at $36 per unit. National's East Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: Sales price per unit $50.00 Variable cost per unit 22.50 Fixed cost (at capacity) per unit 11.00 If the East Division meets the outside supplier's price and sells the 10,000 ventilators to West, the effect on overall company profits will be: A. $275.000 lower B. $150,000 lower C. $140,000 lower D. $360,000 higher

Answer 1

The correct option is C

$140,000 lower

Step-by-step explanation:

Since the East Division is operating at full capacity, this implies that it can sell all it can produce and sell to the external make a contribution

=(50-22.50)× 10,000

= $275000

If now decides to match the supplier's price and sell at $36,

it will now make a contribution equals to

=(36- 22.50)× 10,000

= 135000

The net position for the group

=Contribution after the decision -Contribution before the decision

=135000 -$275000

= $140,000 lower

Note that the fixed cost is irrelevant for this decision because it will be incurred either way