Swan Company has two divisions,Hill and Paradise.Hill produces a unit that Paradise could use in its production.Paradise currently is purchasing 5,000 units from an outside supplier for $56.Hill is operating at less than full capacity and has variable costs of $30.80 per unit.The full cost to manufacture the unit is $43.40.Hill currently sells 450,000 units at a selling price of $61.60.What would be the impact on Swan Company's overall profits if the internal transfer is made?
A)$28,000 increase
B)$126,000 increase
C)$7,000 decrease
D)No change in profits

Question

Quizplus · Accepted Answer

If the internal transfer is made, the Paradise division would buy from Hill at a price lower than the outside supplier's price of $56.

The cost to Hill to produce the unit is $43.40, but they can sell it to Paradise for anything above $30.80 and still be better off.

Assuming a transfer price of $45 per unit, Hill would make a profit of $14.20 per unit ($45 - $30.80) and Swan Company would be able to eliminate the outside supplier's cost of $56, resulting in a savings of $11.

Paradise would save $11 per unit by purchasing internally rather than from the outside supplier.

Swan Company's overall profits would increase by (11 x 5,000) + (450,000 x 14.20) = $126,000.

Therefore, the correct answer is B) $126,000 increase.

Swan Company Has Two Divisions,Hill and Paradise