Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $43, $26 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $58.The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (32,000 hinges) at a cost of $53. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 32,000 hinges it needs from the outside vendor for $53?a. No change in profit to Altoona.b. $160,000 increase in profits.c. $160,000 decrease in profits.d. $864,000 decrease in profits.

Answer 1

d. $864,000 decrease in profits.

Step-by-step explanation:

Hinge Division's total cost per unit:

variable $26

fixed $17

total $43

sales price $58

contribution margin $32

profit margin $15

Alternative A Alternative B Differential

intercompany outside amount

money paid to $0 $1,696,000 ($1,696,000)

outside vendor

variable costs $832,000 $0 $832,000

fixed costs $544,000 $544,000 $0

total costs $1,376,000 $2,240,000 ($864,000)

If the hinges are purchased form an outside vendor, the corporation's total profits will decrease by $864,000.