Division A's cost accounting records show that the cost of its product is $150 per unit-$100 in variable costs and $50 in fixed costs. The market price of the product, $160, barely covers Division A's cost of production plus its selling and administrative costs. Division A has a maximum capacity of 100,000 units; it is currently producing and selling 75,000 units. Division B makes a product that uses Division A's product and would like to purchase 10,000 units from Division A for $150. With $40 additional variable costs, Division B produces and sells the product for $225. Division A's manager is not happy with Division B's offer and is refusing to sell.

Calculate the increase in corporate income in the following situations:
a. Division A sells 10,000 units to Division B for $150 each, and Division B produces and sells 10,000 units for $225.
b. Division A does not sell to Division B. Division B purchases 10,000 units from an external supplier at $160 each and produces and sells 10,000 units for $225.

  • CreatedFebruary 21, 2014
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