Dynamic Engine Corporation The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Dynamic Engine Corporation manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally.
Refer to Dynamic Engine Corporation. If the two divisions agree to transact with one another, corporate profits will
A) drop by $30,000 per month.
B) rise by $20,000 per month.
C) rise by $50,000 per month.
D) rise or fall by an amount that depends on the level of the transfer price.

Question

Dynamic Engine Corporation The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per month in its production of automotive engines. It presently buys all of the carburetors it needs from two outside suppliers at an average cost of $100. The Carburetor Division of Dynamic Engine Corporation manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
 Assume that the Carburetor Division would not incur any variable selling costs on units that are transferred internally.
Refer to Dynamic Engine Corporation. If the two divisions agree to transact with one another, corporate profits will
A) drop by $30,000 per month. 
B) rise by $20,000 per month. 
C) rise by $50,000 per month. 
D) rise or fall by an amount that depends on the level of the transfer price.

Quizplus · Accepted Answer

If the Motor Division buys carburetors from the Carburetor Division at a price of $100 per unit, the Motor Division can save $6 per unit compared to buying from outside suppliers. The savings on 5,000 units will be $30,000 per month. At the same time, the Carburetor Division can sell 5,000 units to the Motor Division at $100 per unit, which is still $6 per unit higher than its variable cost of $94 per unit. Therefore, the Carburetor Division can increase its profit by $30,000 per month (5,000 units x $6 per unit) by selling units to the Motor Division instead of to the foreign car manufacturer. The total increase in corporate profits will be $30,000 for the Motor Division (savings on purchasing) + $30,000 for the Carburetor Division (additional profit from internal sales) = $60,000. Therefore, the corporate profits will rise by $50,000 per month ($60,000 increase in profits - $10,000 loss in profits from no longer selling to the foreign car manufacturer).

Dynamic Engine Corporation the Motor Division of Dynamic Engine Corporation