Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-What is the monthly operating advantage (disadvantage)of purchasing the goods internally assuming the Production Division is able to utilize the facilities for other operations resulting in monthly cash-operating savings of $40,000?
A)$440,000
B)$40,000
C)$280,000
D)$(280,000)
E)$(360,000)

Question

Quizplus · Accepted Answer

If the Assembly Division purchases the stuffing internally, they would pay $40 per kilogram which would result in a total monthly cost of:

20,000 kg x $40/kg = $800,000

If the Assembly Division purchases the stuffing from the external suppliers, they would pay $20 per kilogram which would result in a total monthly cost of:

20,000 kg x $20/kg = $400,000

Therefore, the monthly disadvantage of purchasing internally would be:

$800,000 - $400,000 = $400,000

However, if the Production Division is able to utilize the facilities for other operations resulting in monthly cash-operating savings of $40,000, this would result in a monthly advantage of:

$40,000

Therefore, the net monthly disadvantage of purchasing internally would be:

$400,000 - $40,000 = $360,000

Thus, the best choice would be to continue purchasing the stuffing from external suppliers.

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