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12 December, 23:49

Sunland Company 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 26000 units to the Production Division at 1050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $3150 and unit variable costs and fixed costs of $1050 and $2100, respectively. The Production Division is currently paying $3000 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

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Answers (1)
  1. 13 December, 03:23
    0
    Important dsiclamer: there was a type in the question you enter 26,000 while in the textbook is for 20,000

    Answer:

    a. Decrease $1,200,000

    Explanation:

    Income before internal transfer:

    revenue 3150

    cost 1050

    gross 2100

    fixed (2100)

    operating 0

    external engine purchase (3000)

    net (3000)

    After internal change:

    revenue 1050

    cost (960)

    gross profit 90

    fixed (2100)

    operating (2010)

    internal engine purchase (1,050)

    net (3,060)

    difference - 3060--3000 = 60

    20,000 units x 60 = 1,200,000
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