Given the following data for Division L: Division N would like to purchase 11,00

Question

Given the following data for Division L:
    

      

Division N would like to purchase 11,000 units from Division L at a price of $85 per unit. Division L has no excess capacity to handle Division N's requirements. Division N currently purchases from an outside supplier at a price of $100. If Division L accepts a $85 price internally, the company, as a whole, will be better or worse off by:

  Selling price to outside customers $ 110   Variable cost per unit 60   Fixed cost per unit (based on capacity) 20   Capacity (in units) 30,000

Explanation / Answer

In current Situation Division L profit Profit per unit (110-60-20)                   30 Units Sale            30,000 Profit          900,000 In order accept then Division L profit Profit per unit (110-60-20) sale external                   30 Profit per unit (85-60-20) sale Division N 5 No. of Units sale external (30000-11000) 19000 No. of Units sale Division N (30000-11000) 11000 Total Profit From External (30*190000)          570,000 Total Profit FromDivision N (110000*5)            55,000 Total Profit of Division L          625,000 Division L loss of sale N          275,000 Division N Saving if buy from division L (100-85)*11000          165,000 Division L Profit          625,000 Inter department profit            55,000 Company total Profit          845,000 Company as a whole will be Worse off becauses company earlier margin is better

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