Holiday Corp. has two divisions, Quail and Marlin. Quail produces a widget that Marlin could use in its production. Quail's variable costs are $4 per widget while the full cost is $7. Widgets sell on the open market for $12 each. If Quail is operating at capacity, what would be the cost savings if the transfer was made and Marlin currently is purchasing 100,000 units on the open market?
A) $0
B) $700,000
C) $800,000
D) $1,200,000

Question

Quizplus · Accepted Answer

If Quail is operating at capacity, it means they are already selling all their widgets at the market price of $12. Therefore, there would be no cost savings for Marlin by transferring internally, as they would still need to pay the market price.