Division Y sells a food product internally to Division Z.Division Z uses the food product to produce vegetarian burgers that sell for $5 per pound.Division Y incurs costs of $0.75 per pound to produce the food product and sells the food product to Division Z for $1.00 per pound.Division Z incurs additional costs of $2.50 per pound to produce the final product of vegetarian burgers.Division Z can purchase the food product needed from outside suppliers for $0.75 per pound,but does not do so.Which formula should be used to determine the company's operating income?
A)$5.00 - $0.75 - $1.00 - $0.75 - $2.50 = 0
B)$5.00 - $0.75 - $1.00 - $2.50 = $0.75
C)$5.00 - $0.75 - $2.50 = $1.75
D)$5.00 - $0.75 - $1.00 + $0.75 = $4.00

Question

Quizplus · Accepted Answer

To find the operating income, we need to subtract the total costs incurred by the company from the total revenue earned. 
Total revenue earned by Division Z from selling vegetarian burgers = $5.00 per pound 
Cost incurred by Division Z to produce vegetarian burgers = $2.50 per pound 
Cost incurred by Division Y to produce the food product = $0.75 per pound 
Cost incurred by Division Z to purchase the food product from Division Y = $1.00 per pound

Therefore, the total cost per pound incurred by the company to produce vegetarian burgers using Division Y's food product = $0.75 + $1.00 + $2.50 = $4.25

Operating income per pound = Revenue per pound - Total cost per pound 
= $5.00 - $4.25 = $0.75

Hence, the best choice is C.

Division Y Sells a Food Product Internally to Division Z