Question

The Stake Division of the Outdoor Lumination Company produces stakes which can be sold to outside customers or transferred to the Solar Light Division of the Outdoor Lumination Company. Last year, the Solar Light Division bought 70,000 stakes from the Stake Division. The following data are wailable for last year's activities in the Stake Division Capacity in units Quantity sold to outside customers Selling price per stake to outside customers Total variable costs per stake Fixed operating costs 425,000 stakes 355,000 stakes $ 3.50 $ 2.70 $250,000 In order to sell 70.000 stokes to the Solar Light Division, the Stake Division had to give up sales of 61.250 stakes to outside customers. That is, the Stake Division could sell 415,250 stakes each year to outside customers (rather than only 355,000 stakes as shown above) it were not making sales to the Solar Light Division Suppose that last year an outside supplier would have been willing to provide the Solar Light Division with the basic stakes at $2.80 each. If the Solar Light Division had chosen to buy all of its stakes from the outside supplier instead of the Stake Division, the change in net operating income for the company as a whole would have been

Answer 1

Answer:

Contribution earned on 61,250 stakes sold to outsiders = 61,250*0.8	$          49,000
Extra cost on buying 70,000 stakes from outside = 70,000*(2.80-2.70)	$            7,000
Increase in NOI	$          42,000

Note:

Contribution Per Stake = Selling Price Per Stake - Variable Cost Per Stake

= 3.50 - 2.70

= 0.80