The Dubs division of Fast Company (the parent company) produces wheels for off-road sport vehicles. One-half of Dub's output is sold to the Hoon division of Fast; the remainder is sold to outside customers. Dub's estimated operating profit for the year is shown in the table.

	Internal Sales	External Sales	Totals
Sales	$300,000	$400,000	$700,000
Var Mfg.	$160,000	$160,000	$320,000
Var G&A	$40,000	$60,000	$100,000
CM	$100,000	$180,000	$280,000
Fixed Mfg.	$24,000	$32,000	$56,000
Fixed G&A	$36,000	$48,000	$84,000
Op. Profits	$40,000	$100,000	$140,000
Unit Sales	1,000	1,000	2,000

Unless otherwise stated assume the fixed costs given above are allocated costs and unavoidable. Hoon division has an opportunity to purchase 1,000 wheels of the same quality from an outside supplier on a continuing basis for $250.00 per wheel.

To simplify this example, assume the capacity of the Dubs division is 2,000 units and it is producing and selling units as shown in the table.

• The managers of Dubs believe it could sell an additional 500 units at the current price into the external market.
• The senior management of Fast company requires Dubs to provide the Hoon division with 1,000 units at the current internal price.
• Dubs managers believe that an additional 500 units of capacity could be acquired by expanding their current facilities and investing in several new machines. They expect this would increase the total fixed manufacturing costs of Dubs by $60,000 per year.

By how much would Dubs’ total operating profit change if this investment were undertaken? Indicate an increase with a positive number and a decrease with a negative number, e.g. -10000.

1). To simplify this example, assume the capacity of the Dubs division is 2,000 units and it is producing and selling units as shown in the table. If Dubs could sell all of its units in the external market at the current external selling price, by how much would Fast’s total contribution margin increase? Now also assume the Hoon division’s external supplier has raised its price to $325.00 per wheel. Indicate an increase with a positive number and a decrease with a negative number, e.g. -10000.

2). What would be the increase in Hoon division’s total operating profits if Fast Company allows the Hoon division to purchase the wheels it needs from the outside supplier?

3). By how much would Dubs’ total operating profit change if this investment were undertaken? Indicate an increase with a positive number and a decrease with a negative number, e.g. -10000.

Answer rating: 100% (QA)

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