The Cycle Division of Sarrel Company has the following per unit data related to its most recent cycle called Roadbuster.

Presently, the Cycle Division buys its body frames from an outside supplier. However Sarrel has another division, FrameBody that makes body frames for other cycle companies. The Cycle Division believes that FrameBody's product is suitable for its new Roadbuster cycle. Presently, FrameBody sells its frames for $350 per frame. The variable cost for FrameBody is $260. The Cycle Division is willing to pay $275 to purchase the frames from FrameBody.

Instructions
(a) Assume that FrameBody has excess capacity and is able to meet all of the Cycle Division's needs. If the Cycle Division buys 1,000 frames from FrameBody, determine the following:
(1) Effect on the income of the Cycle Division;
(2) Effect on the income of FrameBody;
(3) Effect on the income of Sarrel.
(b) Assume that FrameBody does not have excess capacity and therefore would lose sales if the frames were sold to the Cycle Division. If the Cycle Division buys 1,000 frames from FrameBody, determine the following:
(1) Effect on the income of the Cycle Division;
(2) Effect on the income of FrameBody;
(3) Effect on the income of Sarrel.

Transcribed Image Text:

Selling price Variable cost of goods sold $2,200 Body frame Other variable costs $300 900 1,200 $1,000 Contribution margin