Division R of Harris Corporation has the capacity for making 40,000 wheel sets per year and regularly sells 36,000 each year on the outside market. The regular selling price on the outside market is $89 per wheel set, and the variable production cost per unit is $56. Division S of Harris Corporation currently buys 6,000 wheel sets (of the kind made by Division R) yearly from an outside supplier at a price of $85 per wheel set. If Division S were to buy the 6,000 wheel sets it needs annually from Division R at $83 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:
A) $108,000
B) $174,000
C) $162,000
D) $96,000

Question

Quizplus · Accepted Answer

The change in annual net operating income would be $108,000. Division R can sell the wheel sets to Division S at $83, which is above the variable cost of $56, resulting in a contribution margin of $27 per unit. For 6,000 units, this results in an increase of $162,000. However, Division S saves $2 per unit compared to the outside supplier, resulting in a cost saving of $12,000. The net effect is $162,000 - $54,000 = $108,000 increase in net operating income.

Division R of Harris Corporation Has the Capacity for Making