Altoona Corporation has two divisions, Hinges and Doors, which are both organize

Question

Altoona Corporation has two divisions, Hinges and Doors, which are both organized as profit centers; the Hinge Division produces and sells hinges to the Door Division and to outside customers. The Hinge Division has total costs of $43, $26 of which are variable. The Hinge Division is operating significantly below capacity and sells the hinges for $58.
The Door Division has received an offer from an outsider vendor to supply all the hinges it needs (32,000 hinges) at a cost of $53. The manager of the Door Division is considering the offer but wants to approach the Hinge Division first.

What would be the profit impact to Altoona Corporation as a whole if the Door Division purchased the 32,000 hinges it needs from the outside vendor for $53?

No change in profit to Altoona.

$160,000 increase in profits.

$160,000 decrease in profits.

$864,000 decrease in profits.

Explanation / Answer

Maximum price Door Division would like to pay for 32,000 hinges is the price on which they received an offer from outside vendor i.e $53 per hinges.

As we know from the fact, Hinge Division is operating significantly below capacity, so they can produce extra 53,000 Hinges without loosing any profit from the current production.

Calculation of proft/(loss) for Altoona Corporation as a whole if the Door Division purchased the 32,000 hinges it needs from the outside vendor for $53:
Variable cost $26
Less: Purchase price $53
Profit/(Loss) per Hinge ($27)

Total Loss 32,000 x $27 = 864,000

Profit will be decreased by $864,000.

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