Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X:
Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
$$\begin{array} { l r }
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.70 \
\text { Fixed overhead } & 1.00 \
\text { Total } & \$ 2.15
\end{array}$$
-Refer to the Figure.Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20.What are the total cost savings for Videostuff?
A)$18,000
B)$63,000
C)$69,000
D)$81,000

Question

Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X:
Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives).
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 0.30 \
\text { Direct labour } & 0.15 \
\text { Variable overhead } & 0.70 \
\text { Fixed overhead } & 1.00 \
\text { Total } & \$ 2.15
\end{array}$$
-Refer to the Figure.Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20.What are the total cost savings for Videostuff?
A)$18,000
B)$63,000
C)$69,000
D)$81,000

Quizplus · Accepted Answer

Videostuff's cost savings come from the difference between the outside supplier's price ($2.50) and the agreed transfer price ($2.20) for each unit of component X. The savings per unit is $0.30 ($2.50 - $2.20). For 60,000 units, the total cost savings is 60,000 units * $0.30/unit = $18,000.

Giga-Stuff, Inc -Refer to the Figure