Question

Division A of Pirkul and Co., is the only source of supply for an intermediate product, INTPRO, that can potentially be converted by Division B into a finished product, FINPRO. There is no outside market for INTPRO. If A decides to produce INTPRO, it can produce 60,000 units per month after spending variable costs of $10.00 per unit. As an alternative, without any change in its monthly fixed costs, it can produce and sell (in the outside market) 60,000 units per month of a new product, ANEWPRO, for a contribution of $7 per unit. The above two options are the only opportunities available to A.

If Division B decides to convert INTPRO into FINPRO, it will need one unit of INTPRO to manufacture one unit of FINPRO and it can then sell 60,000 units of FINPRO at a selling price of $48 per unit after spending an additional $10 per unit in variable costs. As an alternative, without any change in its monthly fixed costs, B can produce and sell 40,000 units per month of a new product, BNEWPRO, using components bought from outside, for a contribution of $21 per unit. Again, assume that these are the only two opportunities that B has.

The total incremental economic benefit to Pirkul and Co. because of the transfer and conversion of INTPRO into FINPRO, when compared to the next best action, is:

		$420,000
		-$420,000
		0
		$600,000
		-$240,000
		$240,000

Answer 1

			Division A		Division B
First option to transfer and convert
INTPRO into FINPRO
Variable Cost			$        600,000		$        600,000
Sales					$    2,880,000
Income			$     (600,000)		$    2,280,000
Total income			$    1,680,000
			Division A		Division B
Second option to produce new products
ANEW PRO Margin			$        420,000
BNEW PRO Margin					$        840,000
Income			$        420,000		$        840,000
Total Income			$    1,260,000
Net Income			$        420,000
Incremental economic benefit in transfer and conversion
INTPRO into FINPRO