We Heart Cows makes animal-free jackets. The Fabric Division makes the faux leat

Question

We Heart Cows makes animal-free jackets. The Fabric Division makes the faux leather that is used by the Jacket Division. Product cost per yard for the fabric is:

The Jacket Division needs 28,000 yards of fabric annually. Currently, the Jacket Division purchases fabric from an outside supplier for $4.50 per yard, because the Fabric Division has been selling all of their fabric to external buyers for $4.50 per yard. This year, the Fabric Division has lost a major customer and has capacity to fill the Jacket Division’s demand. The managers of the two divisions negotiate a mutually agreeable transfer price of $4.25 per yard. Compute the total cost savings for the Jacket Division.

A  : $7,000

B  : $6,000

C  : $5,000

D  : $4,500

Explanation / Answer

A : 7000

COST TO JACKET DIVISION   

*) Normal purchasing cost (from outside) = 4.5×28000=126000

*)if purchase from fabrig segment = 4.25×28000=119000

TOTAL SAVINGS =126000-119000= 7000

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