Question

Bonita Industries 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 17000 units to the Production Division at 1050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2150 and unit variable costs and fixed costs of $1050 and $1100, respectively. The Production Division is currently paying $2000 per unit to an outside supplier. $90 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?

A) Increase $16150000

B) Decrease $2550000

C) Decrease $1020000

D) Increase $1423256

Answer 1

The fixed costs would remain fixed and will not be incurred additionally if units are transferred to production engine and therefore is not relevant costs
Purchase price from outside supplier	34000000	17000*2000
Internal price transfer	17850000	17000*1050
Increase in profit	16150000
There would be cost savings for the company by $16,150,000 and so the profit would increase by $16,150,000.