Use the information below to answer the following question(s).Crush Company makes internal transfers at 180% of full cost.The Soda Refining division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $30 per container via an external shipper.In order to reduce costs the company located an independent producer in Manitoba who is willing to sell 30,000 containers at $20 each, delivered to Crush Company's shipping division in Manitoba.The company's Shipping Division in Manitoba can ship the 30,000 containers at a variable cost of $2.50 per container and a full cost, based on practical capacity, of $4.00 per container.When the company's Manitoba shipping division ships for external customers is charges $6.00 per container.
-What is the total incremental cost of purchasing the water from the independent producer and shipping it to the Soda Division if the company's Manitoba shipping division has idle capacity?
A)$600,000
B)$675,000
C)$720,000
D)$816,000
E)$780,000

Question

Quizplus · Accepted Answer

The total incremental cost would include the cost of purchasing the water from the independent producer ($20 per container) and the cost of shipping it from Manitoba to the Soda Division.

The cost of shipping would be:

Variable cost per container: $2.50
Full cost per container (based on practical capacity): $4.00
Total cost per container: $6.50

However, since the Manitoba shipping division has idle capacity, it can ship at the internal transfer rate of 180% of full cost instead of the external customer rate of $6.00 per container.

180% of full cost per container: 1.8 x $4.00 = $7.20

Therefore, the total incremental cost per container would be:

$20 (cost of water) + $7.20 (shipping cost) - $30 (cost of current supplier) = -$2.80

This means that Crush Company would actually save $2.80 per container by purchasing from the independent producer and using its Manitoba shipping division to transport the water to the Soda Division.

Total savings per day (30,000 containers): $2.80 x 30,000 = $84,000

Total savings per year (365 days): $84,000 x 365 = $30,660,000

Therefore, the best choice is to purchase from the independent producer and use the Manitoba shipping division to transport the water to the Soda Division.

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