Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase stuffing,a key component,from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per pound for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information - variable cost $32 and fixed cost $8 -to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 pounds of stuffing per month. What would be the monthly operating advantage (disadvantage)of purchasing the goods internally,assuming the external supplier increased its price to $50 per pound and the Production Division is able to utilize the facilities for other operations,resulting in a monthly cash-operating savings of $30 per pound?
A) $1,000,000
B) $360,000
C) $(240,000)
D) $(400,000)

Question

Quizplus · Accepted Answer

If the Assembly Division purchases the stuffing from the external supplier at $50 per pound, then the monthly cost would be:

$50 * 20,000 = $1,000,000

If the Assembly Division purchases the stuffing internally from the Production Division, then the monthly cost would be:

($40 - $32) * 20,000 = $160,000

However, there is also a monthly cash-operating savings of $30 per pound that the Production Division is able to utilize for other operations. Therefore, the total monthly cost of purchasing internally would be:

($40 - $32 - $30) * 20,000 = $160,000 - $160,000 = $0

This means that purchasing internally would result in a monthly operating advantage of $1,000,000 - $0 = $1,000,000. However, since the question asks for the operating advantage (disadvantage), the answer would be negative or a disadvantage. Therefore, the monthly operating disadvantage would be:

-$1,000,000 or $(1,000,000)

Therefore, the best choice is C.

Soft Cushion Company Is Highly Decentralized