A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where Production could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operations are as follows: Currently, there is no intermediate market for the Production department to sell its products, so all of the sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assume that the Production department finds an external vendor and can sell 40,000 units of its products for $0.72 per unit and that there was no change in the Production department's current transfer price. Then, what is the percentage change in operating income that they would see?
A) 10.45% increase
B) 17.29% decrease
C) 17.29% increase
D) 20.9% decrease

Question

A factory has several business units and is vertically integrated throughout most of its supply chain. One of the first ways the company moved in this direction was to purchase a Wholesale department where Production could directly sell its products. The Wholesale department purchases the final product from the Production department, packages the product, and then sells it to the external vendors. The results of this part of the operations are as follows:  Currently, there is no intermediate market for the Production department to sell its products, so all of the sales are from the 80,000 units sold to the Wholesale department. The product created by the Production department is very unique, and the Wholesale department cannot acquire it from another vendor or supplier. Assume that the Production department finds an external vendor and can sell 40,000 units of its products for $0.72 per unit and that there was no change in the Production department's current transfer price. Then, what is the percentage change in operating income that they would see?
A) 10.45% increase 
B) 17.29% decrease 
C) 17.29% increase 
D) 20.9% decrease

Quizplus · Accepted Answer

Under the given conditions, the Production department is reporting operating income of $7,655 by selling all products to the internal Wholesale department. If they found themselves with an external customer that would receive $0.72 per unit for the order of 40,000 units, then this would create sales of 40,000 × $0.72 per unit = $28,800. Next, calculate the sale generated from the wholesale department: 40,000 × 0.70 per unit = $28,000. Now, calculate the new operating income: $28,800 + $28,000 - $28,600 - $19,745 = $8,455. The percentage change can be measured as follows: ($8,455 - $7,655)/$7,655 = 0.1045 or 10.45% increase (Choice A).

A Factory Has Several Business Units and Is Vertically Integrated