(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer: Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price.If Division T meets the price of the overseas supplier and sells 5, 000 timers to Division S each month, the effect on the monthly net operating income of the company as a whole will be:
A)increase of $15, 000
B)decrease of $15, 000
C)decrease of $60, 000
D)increase of $10, 000

Question

(Appendix 12A)Division T of Clocker Company makes a timer which it sells for $30 to outside customers.The division has supplied the following data concerning the timer:  Division S of Clocker Company is currently buying 5, 000 similar timers each month from an overseas supplier at $27 each.Division S would like to acquire its timers from Division T if the price is right. Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price.If Division T meets the price of the overseas supplier and sells 5, 000 timers to Division S each month, the effect on the monthly net operating income of the company as a whole will be:
A)increase of $15, 000 
B)decrease of $15, 000 
C)decrease of $60, 000 
D)increase of $10, 000

Quizplus · Accepted Answer

Total contribution margin on lost sales = CM per unit × Lost outside sales
= ($30 per timer - $15 per timer)× 5, 000 timers = $75, 000
Savings from purchasing internally rather than buying the timer from the overseas supplier = ($27 per timer × 5, 000 timers)- ($15 per timer × 5, 000 timers)= $60, 000
Overall profits would decline by $15, 000, the difference between total contribution margin on lost sales and the savings from purchasing internally rather than buying the timer from the overseas supplier.

(Appendix 12A)Division T of Clocker Company Makes a Timer Which