The Stake Division of the Outdoor Lumination Company produces stakes which can b

Question

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 82,000 stakes from the Stake Division at $3.40 each. The following data are available for last year's activities in the Stake Division:

In order to sell 82,000 stakes to the Solar Light Division, the Stake Division must give up sales of 49,200 stakes to outside customers. That is, the Stake Division could sell 407,200 stakes each year to outside customers (rather than only 358,000 stakes as shown above) if it were not making sales to the Solar Light Division.

Suppose that last year an outside supplier would have been willing to provide the Solar Light Division with the basic stakes at $3.10 each. If the Solar Light Division had chosen to buy all of its stakes from the outside supplier instead of the Stake Division, the change in net operating income for the company as a whole would have been:

$77,900 increase.

$45,100 decrease.

$45,100 increase.

$32,800 increase.

Capacity in units 440,000 stakes Quantity sold to outside customers 358,000 stakes Selling price per stake to outside customers $ 3.80 Total variable costs per stake $ 3.05 Fixed operating costs $ 280,000

Explanation / Answer

Contribution earned on 49200 stakes sold to outsiders = 49200*0.75= $          36,900 Extra cost on buying 82000 stakes from outside = 82000*(3.10-3.05)= $            4,100 Increase in NOI $          32,800

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