Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engi

Question

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The Production Division is currently paying $2,400 per unit to an outside supplier. $90 per unit can be saved on internal sales from reduced selling expenses. What is the increase/decrease in overall company profits if this transfer takes place? A) Decrease $1,200,000 B) Increase $2,520,000 C) Decrease $3,000,000 D) Increase $27,000,000

Explanation / Answer

Solution - To solve this we need to consider three factors

1) Engine Division will bear losses because of selling to own production Division in lower prices

2) Production Division will increase saving by Purchasing from own Engine Division instead of paying more to outside Supplier

3) By Interselling the selling expenses will be saved

We need to calculate the amount for the above three consideration and the net of all will be the increase/decrease in overall company profits if this transfer takes place

Considering all the three above we have a loss that is A ) decrease of $1200000

1 ) Engine Division sales Units Selling Price Amount At present 20000 2550 51000000 If Transfer takes place 20000 1050 21000000 Decrease in Profit 30000000

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