Division A’s cost accounting records show that the cost of its product is $151 per unit—$118 in variable costs and $33 in fixed costs. The market price of the product, $162, barely covers Division A’s cost of production plus its selling and administrative costs. Division A has a maximum capacity of 100,800 units; it is currently producing and selling 77,900 units. Division B makes a product that uses Division A’s product and would like to purchase 10,000 units from Division A for $158. With $40 additional variable costs, Division B produces and sells the product for $234. Division A’s manager is not happy with Division B’s offer and is refusing to sell.
Calculate the increase in corporate income in the following situations: a. Division A sells 10,000 units to Division B for $158 each, and Division B produces and sells 10,000 units for $234. b. Division A does not sell to Division B. Division B purchases 10,000 units from an external supplier at $162 each and produces and sells 10,000 units for $234.
Increase in corporate income
a. $
b. $