Question

The Dubs division of Fast Company (the parent company) produces wheels for off-road sport vehicles. One-half of Dub's output is sold to the Hoon division of Fast; the remainder is sold to outside customers. Dub's estimated operating profit for the year is shown in the table. Internal Sales External Sales Totals Sales $300,000 $400,000 $700,000 Var Mfg. $160,000 $160,000 $320,000 Var G&A $40,000 $60.000 $100,000 CM $100,000 $180,000 $280,000 Fixed Mfg. $24,000 $32,000 $56,000 Fixed G&A $36,000 $48.000 $84,000 Op. Profits $40,000 $100,000 $140,000 Unit Sales 1,000 1,000 2,000 Unless otherwise stated assume the fixed costs given above are allocated costs and unavoidable. Hoon division has an opportunity to purchase 1,000 wheels of the same quality from an outside supplier on a continuing basis for $250.00 per wheel. Assume the Dubs division has excess production capacity but can only sell 1,000 units to external customers. What would be the change in Fast's total operating profit if it allows the transfer from Dubs to Hoon to occur at the $250.00 price?

Answer 1

Ø If it allow the transfer from Dubs to Hoon to occur at the $300000 Price

	Internal Sales	External Sales
Sales	300000	400000
Variable Mfg.	160000	160000
Variable G & A	40000	60000
CM	100000	180000
Fixed Mfg.	24000	32000
Fixed G & A	36000	48000
Operating Profit	40000	100000
Unit Sales	1000	1000
Operating Profit	40,000,000	100,000,000	140,000,000

Ø If it allow the transfer from Dubs to Hoon to occur at the $250000 Price

	Internal Sales	External Sales	Total Profit
Sales	250000	400000
Variable Mfg.	160000	160000
Variable G & A	40000	60000
CM	50000	180000
Fixed Mfg.	24000	32000
Fixed G & A	36000	48000
Operating Profit	-10000	100000
Unit Sales	1000	1000
Operating Profit	-10000000	100000000	90,000,000

Change in the profit, if it allow the transfer from Dubs to Hoon to occur at the $250000 Price

= 140000000 - 90000000

= 50,000,000 reduce