Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-The Production Division has no alternative use for the facilities used to manufacture the stuffing.What is the monthly operating income advantage (disadvantage)if the goods are purchased internally?
A)$400,000
B)$640,000
C)$240,000
D)$(240,000)
E)$(400,000)

Question

Quizplus · Accepted Answer

If the Assembly Division purchases the stuffing internally at $40 per kilogram, the cost for 20,000 kg would be $800,000. 
If the Assembly Division purchases the stuffing externally at $20 per kilogram, the cost for 20,000 kg would be $400,000. 
The variable cost for the Production Division to produce 20,000 kg of stuffing is $32 per kilogram, which amounts to a total of $640,000. 
Therefore, the monthly operating income advantage of purchasing externally is: 
$800,000 - $400,000 = $400,000 
And the monthly operating income advantage of purchasing internally is: 
$800,000 - $640,000 = $160,000 
Since the Assembly Division can save $400,000 by purchasing externally, it is the best choice.

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