Question

Division P of Launch Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Launch Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:______

a. $600,000

b. $225,000

c. $750,000

d. $135,000

Answer 1

b. $225,000

Step-by-step explanation:

The computation of the change in annual net operating income is shown below:

First we need to do following calculations

Sales of Division P is

= Sale Units × Sales Price Per Unit

= 60,000 × $100

=$6,000,000

Variable Cost is

= Sale Units × Variable Cost Per Unit

= 60,000 × $65

= $3,900,000

Now Current Operating Income is

= Sales - Variable Cost

= $6,000,000 - $3,900,000

= $2,100,000

Operating Capacity of Division P is 75,000 Units

If Division Q buy 30,000 wheel sets annually from Division P at $87 than Operating Income of Division P:-

= 75,000 - 30,000

= 45,000 Units

Sales is

= 45,000 Units × $100 + 30,000 units × $87

= $45,00,000 + $26,10,000

= $71,10,000

Variable Cost is

= 75,000 Units × $65

= $48,75,000

Post Operating Income is

= Sales - Variable Cost

= $7,110,000 - $4,875,000

= $22,35,000

Increase in Operating Income of Division P is

= Post Operating Income - Current Operating Income

= $2,235,000 - $2,100,000

= $135,000

Increase in Operating Income of Division Q is

= Sale Units × (Outside Supplier Cost Per Unit - Division P Cost Per Unit)

= 30,000 Units × ($90 - $87)

= $90,000

If Q buy the Wheel From Division P. Q saves $3 per wheel set.

Increase in Operating Income of Company is

= Increase in Operating Income of Division P + Increase in Operating Income of Division Q

= $135,000 + $90,000

= $225,000