Crush Company makes internal transfers at 160% of full cost.The Soda Refining Division purchases 40,000 containers of carbonated water per day,on average,from a local supplier,who delivers the water for $40 per container via an external shipper.To reduce costs,the company located an independent supplier in Illinois who is willing to sell 40,000 containers at $30 each,delivered to Crush Company's Shipping Division in Missouri.The company's Shipping Division in Missouri has excess capacity and can ship the 40,000 containers at a variable cost of $4.50 per container.What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division?
A) $1,200,000
B) $1,380,000
C) $1,600,000
D) $180,000

Question

Quizplus · Accepted Answer

The total cost of purchasing the water from the Illinois supplier is:
40,000 containers × $30 per container = $1,200,000

The total cost of shipping the water to the Soda Division is:
40,000 containers × $4.50 per container = $180,000

Therefore, the total cost of purchasing and shipping the water is:
$1,200,000 + $180,000 = $1,380,000

Since Crush Company makes internal transfers at 160% of full cost, the cost of the water to the Soda Division would be:
$1,380,000 × 160% = $2,208,000

Comparing this to the cost of purchasing from the local supplier:
40,000 containers × $40 per container = $1,600,000

It is clear that purchasing from the Illinois supplier and shipping it to the Soda Division is the best choice. The cost savings is:
$1,600,000 - $1,380,000 = $220,000.

Crush Company Makes Internal Transfers at 160% of Full Cost