Question

Division A of Sebastian Enterprises manufactures a product called XYZ. Current data for Division A are as follows:

	Capacity	58238
	Current production & sales	52263

	Per unit data
		Selling price	$93.76
		Variable costs - production	34.91
		Variable costs – marketing relating to external sales	15.38

Division B of Sebastian Enterprises currently buys 24098 units of XYZ yearly from an outside supplier at a price of $59.06. Division B would like to buy the 24098 units of XYZ it needs annually from Division A.
What is the incremental benefit (cost) to Sebastian Enterprises if an internal transfer takes place?

Select one:

a. $-576467

b. $581967

c. $1423228

d. $-205840

Answer 1

Incremental benefit = cost of buying - relevant cost of making

Relevant cost of making for 5975 units will be equal to variable cost since excess capacity

For remaining, it will be equal to current selling price less costs saved

Hence, benefit = 24098*59.06 - 5975*34.91 - 18123*(93.76-15.38)

=-$205,840.11

I.e $205,840

I.e. D