Aerated Water 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.To reduce costs,the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $22 each,delivered to Aerated Water Company's Shipping Division in Missouri.The company's Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $1.50 per container.What is the total cost to Aerated Water Company if the carbonated water is purchased from the local supplier?
A) $900,000
B) $1,200,000
C) $1,501,000
D) $1,620,000

Question

Quizplus · Accepted Answer

If the company purchases water from the local supplier, the cost per container is $30. Thus, the total cost of purchasing 30,000 containers will be:

$30 x 30,000 = $900,000

Since the company makes internal transfers at 180% of full cost, purchasing water from the independent supplier in Missouri will result in a higher cost. The cost per container from the independent supplier is $22, but the company will have to incur additional costs for shipping. The variable cost of shipping per container is $1.50, and the company has to ship 30,000 containers. Thus, the additional cost of shipping will be:

$1.50 x 30,000 = $45,000

The total cost of purchasing water from the independent supplier will be:

$22 x 30,000= $660,000

Total cost = $660,000 + $45,000 = $705,000

If the company purchases water from the independent supplier, the total cost will be $705,000 + the internal transfer cost. This will result in a higher total cost than purchasing water from the local supplier, which is $900,000. Therefore, purchasing water from the local supplier is the best choice.

Aerated Water Company Makes Internal Transfers at 180% of Full