Question

Sunland Company manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 12000 units to the Production Division at 1050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $1750 and unit variable costs and fixed costs of $1050 and $700, respectively. The Production Division is currently paying $1600 per unit to an outside supplier. $60 per unit can be saved on internal sales from reduced selling expenses.

What is the increase/decrease in overall company profits if this transfer takes place?

Increase $6600000

Increase $658286

Decrease $1080000

Decrease $1800000

Answer 1

	Company
Incremental Loss to Engine division(12,000*$700)	$                        -84,00,000
Incremental benefit to Production division(12,000*$550)	$                         66,00,000
Savings in selling expenses(12,000*$60)	$                           7,20,000
Decrease in Profit	$                        -10,80,000
So Option C which is a decrease of $1,080,000 is the answer
Note:
Incremental Loss per unit to Engine division =$1,750 - $1,050 =$700
Incremental benefit to Production division =$1,600 - $1,050 =$550