Division P of Launch Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market.The regular sales price is $100 per wheel set,and the variable production cost per unit is $65.Division Q of Launch Corporation currently buys 30,000 wheel sets (of the kind made by Division P)yearly from an outside supplier at a price of $90 per wheel set.If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set,the change in annual net operating income for the company as a whole,compared to what it is currently,would be:
A)$600,000
B)$225,000
C)$750,000
D)$135,000
E)$700,000

Question

Quizplus · Accepted Answer

Currently, Division P is selling 60,000 wheel sets at $100 each, which brings in a revenue of:
60,000 x $100 = $6,000,000

The variable cost per unit is $65, so the total variable cost for producing 60,000 wheel sets is:
60,000 x $65 = $3,900,000

This means that the contribution margin per unit is:
$100 - $65 = $35

The total contribution margin for the 60,000 wheel sets sold is:
60,000 x $35 = $2,100,000

Now, if Division Q were to buy 30,000 wheel sets from Division P at $87 each, the revenue from these sales would be:
30,000 x $87 = $2,610,000

The variable cost for producing these 30,000 wheel sets would be:
30,000 x $65 = $1,950,000

This would result in a contribution margin of:
$87 - $65 = $22 per unit

The total contribution margin for the 30,000 wheel sets sold to Division Q would be:
30,000 x $22 = $660,000

Therefore, the total contribution margin for the company as a whole would be:
$2,100,000 + $660,000 = $2,760,000

Currently, the company's net operating income is:
$2,100,000 - ($6,000,000 - $3,900,000) = $1,500,000

If Division Q were to buy from Division P instead, the new net operating income would be:
$2,760,000 - ($6,000,000 - $3,900,000 - $2,610,000 + $1,950,000) = $1,725,000

This represents an increase of:
$1,725,000 - $1,500,000 = $225,000

Therefore, the best choice is B, an increase in net operating income of $225,000.

Division P of Launch Corporation Has the Capacity for Making