Division T of Clocker Company makes a timer which it sells for $30 to outside cu
ID: 2498581 • Letter: D
Question
Division T of Clocker Company makes a timer which it sells for $30 to outside customers. The division has supplied the following data concerning the timer: monthly capacity 12000 timers variable cost per unit 15$ per timer fixed cost per unit 10$ per timer Division S of Clocker Company is currently buying 5,000 similar timers each month from an overseas supplier at $27 each. Division S would like to acquire its timers from Division T if the price is right. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price. If Division T meets the price of the overseas supplier and sells 5,000 timers to Division S each month, the effect on the monthly net operating income of the company as a whole will be: increase of $15,000 decrease of $15,000 decrease of $60,000 increase of $10,000
Explanation / Answer
As fixed costs are going to be incurred(120000 upto current operating capacity levels they are irrelevant for this decision making. Division S is going to incur the same amount of expenses(27*5000), under both options Division T is going to lose a sale value of $ 3(30-27) on 5000 units , if it meets the price of Overseas supplier & supplies to Division S ie. $ 15000 Hence, the effect on the monthly net operating income of the company as a whole will be decrease of $15,000