Question

Division T of Clocker Company makes a timer which it sells for $35 to outside customers. The division has supplied the following data concerning the timer:

Monthly capacity	25,000 times
Variable cost per unit	$18 per timer
Fixed cost per unit	$5 per timer

Division S of Clocker Company is currently buying 10,000 similar timers each month from an overseas supplier at $32 each. Division S would like to acquire its timers from Division T if the price is right.

Suppose Division T is operating at capacity and can sell all of the timers it produces to outside customers at its usual selling price. If Division T meets the price of the overseas supplier and sells 10,000 timers to Division S each month, the effect on the monthly net operating income of the company as a whole will be:

rev: 02_05_2016_QC_CS-40277

increase of $30,000

decrease of $30,000

decrease of $140,000

increase of $170,000

Answer 1

Sales price to outside customers	35
Less: Cost from overseas supplier	32
Net Contribution margin lost per unit	3
X Number of units	10000
Decrease in monthly net operating income	30000
Option 2 decrease of $30,000 is correct