Question: Bayfield Division of Ashland Inc. has a capacity of 200,000 units and expects the following results.
Sales (160,000 units at $4) $640,000
Variable costs, at $2 320,000
Fixed costs 260,000
Income $60,000
Washburn Division of Ashland Inc. currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit. Washburn's manager believes he could use a minor variation of Bayfield's product instead, and offers to buy the units from Bayfield at $3.50. Making the variation desired by Washburn would cost Bayfield an additional $0.50 per unit and would increase Bayfield's annual cash fixed costs by $20,000. Bayfield's manager agrees to the deal offered by Washburn's manager.
Required:
a. What is the effect of the deal on Washburn's income?
b. What is the effect of the deal on Bayfield's income?
c. What is the effect of the deal on the income of Ashland Inc. as a whole?