Spice Company has two divisions,Parsley and Sage.Parsley produces a unit that Sage could use in its production.Sage currently is purchasing 50,000 units from an outside supplier for $50.Parsley is operating at less than its full capacity of 550,000 and has variable costs of $27 per unit.The full cost to manufacture the unit is $38.Parsley currently sells 450,000 units at a selling price of $54.If an internal transfer is made,variable shipping and administrative costs of $2 per unit could be avoided.What would be the impact on Spice Company's overall profits if the internal transfer were made?
A)no change in overall profits
B)$1,250,000 increase in profits
C)$200,000 decrease in profits
D)$700,000 increase in profits

Question

Quizplus · Accepted Answer

The internal transfer would save Spice Company the $2 per unit variable shipping and administrative costs on the 50,000 units that Sage is currently purchasing from an outside supplier. This would result in a $100,000 savings ($2 x 50,000). In addition, Parsley would be able to sell 50,000 more units at its current selling price of $54, resulting in an additional $2,700,000 in revenue ($54 x 50,000). The total impact on Spice Company's overall profits would be a $2,800,000 increase ($100,000 + $2,700,000).

Spice Company Has Two Divisions,Parsley and Sage