Division P of Launch Corporation has the capacity for making 82,000 wheel sets p
ID: 2562930 • Letter: D
Question
Division P of Launch Corporation has the capacity for making 82,000 wheel sets per year and regularly sells 67,000 each year on the outside market. The regular sales price is $170 per wheel set, and the variable production cost per unit is $121. Division Q of Launch Corporation currently buys 37,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $160 per wheel set. If Division Q were to buy the 37,000 wheel sets it needs annually from Division P at $143 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would beExplanation / Answer
If division Q were to buy the 37,000 wheels sets it needs annually from Division P at $ 143 per wheel set. the change in annual net operating income for the company as a whole, compared to what is currently, would be : Increases as follows:
Computation of Loss of Contribution Margin from 22000 wheel sets for Division P
Selling Price
170
Less: Variable Costing
121
Contribution Margin
49
Number of Wheel Sets
22000
Total Contribution Margin
1078000
Computation of Contribution Margin for 22000 Units if it sells to Division Q
Selling Price
143
Less: Variable Costing
121
Contribution Margin
22
Number of Wheel Sets
22000
Total Contribution Margin
484000
Computation of Contribution Margin for 15000 Units if it sells to Division Q
Selling Price
143
Less: Variable Costing
121
Contribution Margin
22
Number of Wheel Sets
15000
Total Contribution Margin
330000
Computation of total Contribution Margin for 37000 Units if it sells to Division Q
Contribution Margin from 22000 Sets
484000
Contribution Margin from 15000 Sets
330000
Total Contribution Margin from 37000 Sets
814000
Computation of Net Loss in Contribution Margin if sale is made to Division Q
Total Contribution Margin from 37000 Sets if sale is made to Division Q
814000
Total Contribution margin lost from 22000 units
1078000
Net Loss in Contribution to Division P
-264000
Computation of Savings in variable cost in Division Q
Normal buying price
160
Buying price from Division P
143
Net Savings
17
Number of Sets
37000
Total savings in Variable Costs
629000
Overall profitability of the company will Increase by
Total savings in Variable Costs
629000
Net Loss in Contribution to Division P
-264000
Overall Profitability will increase by
365000
Computation of Loss of Contribution Margin from 22000 wheel sets for Division P
Selling Price
170
Less: Variable Costing
121
Contribution Margin
49
Number of Wheel Sets
22000
Total Contribution Margin
1078000