Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could use in its production. Quail's variable costs are $4 per widget while the full cost is $7. Widgets sell on the open market for $12 each. If Quail has excess capacity, what would be the cost savings if the transfer was made and Marlin currently is purchasing 100,000 units on the open market?
A) $0
B) $700,000
C) $800,000
D) $1,200,000

Question

Quizplus · Accepted Answer

The cost savings for Marlin can be calculated as follows:

Current cost for 100,000 units on open market = $12 x 100,000 = $1,200,000

If Quail transfers 100,000 units to Marlin, the cost to Quail would be: 
100,000 x $4 (variable cost) = $400,000

Therefore, the cost savings for Marlin would be: 
$1,200,000 - $400,000 - $0 (no additional fixed cost incurred by the transfer) = $800,000

Hence, the best choice is C.