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

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Dejah IlooveYoou · Accepted Answer

Final Answer : B, Explanation :  Currently, Division P produces 75,000 wheel sets annually but only sells 60,000 on the outside market. This means that they have excess capacity of 15,000 wheel sets per year.If Division Q buys 30,000 wheel sets from Division P at $87 per wheel set, it would save $3 per wheel set compared to their current supplier, resulting in a cost savings of $90,000 per year (30,000 x $3).At the same time, Division P would be able to sell an additional 30,000 wheel sets without incurring any additional fixed costs, resulting in an additional contribution margin of $22 per unit ($100-$65-$13) or $660,000 in total (30,000 x $22).Therefore, the change in net operating income for the company as a whole would be:$660,000 (contribution margin from selling to Division Q) - $90,000 (cost savings for Division Q) = $570,000This is a significant increase compared to the current situation, resulting in a higher net operating income for the company as a whole. Therefore, the best choice is B.

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