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 a total manufacturing capacity of 2,000 wheels per year. If the maximum external demand for the Dubs division’s wheels is 1,500 units, what would be the Dubs division’s total operating profits if Fast Company allows the Hoon division to purchase the wheels it needs from the outside supplier?

Answer 1

Fast Company Dubs Division External Sales Variable Mfg $240,000 Variable G&A $90,000 Total variable cost Contribution margin Fixed cost Manufacturing $56,000 G&A $84,000 Total Fixed cost Operating profit $600,000 (1,500*$400) (1,500*$160) (1,500*$60) $330,000 $270,000 $140,000 $130,000 Note: Fixed cost remains same at overall level Working notes: External sales Variable Mfg Variable G&A Total $400,000 $160,000 $60,000 Per Unit $400 $160 $60