The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division: The total fixed costs would be the same for all the alternatives considered below.
-Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each.If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division,the change in net operating income for the company as a whole would have been:
A)$1,250 decrease
B)$10,250 increase
C)$1,000 decrease
D)$13,750 decrease

Question

The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division:  The total fixed costs would be the same for all the alternatives considered below.
-Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each.If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division,the change in net operating income for the company as a whole would have been:
A)$1,250 decrease 
B)$10,250 increase 
C)$1,000 decrease 
D)$13,750 decrease

Quizplus · Accepted Answer

The change in net operating income would be a $1,000 decrease because the company would lose the contribution margin from the 15,000 units that could have been sold to outside customers. The cost savings from buying posts at $1.45 each instead of the internal transfer price would not offset this loss.