Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year:
$$\begin{array} { l r }
\text { Sales } ( 90,000 \text { units at } \$ 30 ) & \$ 2,700,000 \
\text { Variable costs, at } \$ 20 & 1,800,000 \
\text { Fixed costs } & \underline{700,000} \
\text { Income } &\underline{ \$ 200,000}
\end{array}$$
Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager.
Required:
(a) What is the effect of the deal on Magnatron's income?
(b) What is the effect of the deal on Veritron's income?
(c) What is the effect of the deal on the income of Argos Incorporated as a whole?

Question

Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year:
 $$\begin{array} { l r } 
\text { Sales } ( 90,000 \text { units at } \$ 30 ) & \$ 2,700,000 \
\text { Variable costs, at } \$ 20 & 1,800,000 \
\text { Fixed costs } & \underline{700,000} \
\text { Income } &\underline{ \$ 200,000}
\end{array}$$ 
Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager.
Required:
(a) What is the effect of the deal on Magnatron's income?
(b) What is the effect of the deal on Veritron's income?
(c) What is the effect of the deal on the income of Argos Incorporated as a whole?

Quizplus · Accepted Answer

The Answer of Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year:
 $$\begin{array} { l r } 
\text { Sales } ( 90,000 \text { units at } \$ 30 ) & \$ 2,700,000 \
\text { Variable costs, at } \$ 20 & 1,800,000 \
\text { Fixed costs } & \underline{700,000} \
\text { Income } &\underline{ \$ 200,000}
\end{array}$$ 
Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager.
Required:
(a) What is the effect of the deal on Magnatron's income?
(b) What is the effect of the deal on Veritron's income?
(c) What is the effect of the deal on the income of Argos Incorporated as a whole?

Veritron Division of Argos Incorporated Has a Capacity of 100,000