The American Battery Company has two divisions, the Electrical Division and the Assembly Division. Both divisions have the full authority to make purchasing and selling decisions of their division output to both outsiders and the other division. (A highly decentralized structure) Each Division operates as a separate profit center and is being evaluated on the basis of the divisionʹs reported profit. The Electrical Division makes the battery cores (inside components) of the battery, and the Assembly Division places those cores in a decorative customized casing to sell to customers. The Electrical Division capacity is 350,000 cores which are sold to both outside parties and the Assembly Division. They can sell the core to outsiders for $150 per unit. The production costs per battery incurred by the Electrical Division are as follows:
Direct materials $ 40
Direct manufacturing labor 30
Variable factory overhead 12
Fixed factory overhead 40
Total $122
The Assembly Division can buy the cores from an outside source for $145. The division adds $25 of incremental costs, and then sells the assembled battery for $190.

QUESTION:

Assuming the Electrical Division is running at 50% capacity, and the Assembly Division needs 100,000 cores, but if the Electrical Division does not produce the 100,000 units, they can use the equipment and space to generate additional cash savings of $6,000,000. What would be the impact on company profits if the Assembly Division buys the cores from an outside supplier instead of buying them from the Electrical Division?
A) Decrease by $9,300,000
B) Increase by $2,700,000
C) Decrease by $300,000
D) Increase by $300,000

Answer rating: 100% (QA)

C Decrease by 300000 If the Assembly Division buys the cores from a... View the full answer