Steven oversees the production department for a factory that makes plastic outdoor chairs. Currently department sells all of its production to external parties, and the department has an overall production capacity of 150,000 chairs. Their sales data is as follows: Sales (90,000 chairs) are $460,000, Variable Costs are $206,200, and Fixed Costs are $194,350. The internal Resale Division would like to purchase 26,700 chairs from the Production Department. They will be selling these to external retailers for $15.49 per chair. If the Resale Division negotiates a deal with the Production Department to purchase each chair for its absorption cost, then what is the amount of Operating Income the Resale Division would report for their sale of 26,700 chairs? Round per unit cost to nearest cents.
A) $294,768
B) $352,440
C) $400,500
D) $413,583

Question

Quizplus · Accepted Answer

This question requires calculation of negotiated prices and operating income. The first step will be to calculate the absorption cost per unit which will be the sum of per unit variable costs and per unit fixed costs. Variable Cost per Unit = $206,200/90,000 chairs = $2.29 per chair. Next, calculate the Fixed Cost per Unit = $194,350/90,000 chairs = $2.16 per chair. Now, combine these two costs to arrive at the absorption cost per unit = $2.29 + $2.16 = $4.45 per chair. Next, calculate the Operating Income per unit for the Resale Division = $15.49 - $4.45 = $11.04 per chair. Lastly, multiply the Operating Income per chair by the 26,700 chairs sold. $11.04 per chair times 26,700 = $294,768 (Choice A).

Steven Oversees the Production Department for a Factory That Makes