The National Division of RedBubble Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. RedBubble's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: $\begin{array}{llcc}
\text { Sales price per unit } &\$45.00 \
\text { Variable costper unit } &22.50\
\text {Fixed cost (at capacity) per unit } &15.00\
\end{array}$

If the Overseas Division meets the outside supplier's price and sells the 10,000 widgets to National, the effect on overall company profits will be
A) $150,000 lower
B) $300,000 higher
C) $ 75,000 higher
D) $225.000 lower

Question

The National Division of RedBubble Ltd is buying 10,000 widgets from an outside supplier at $30 per unit. RedBubble's Overseas Division, which is producing and selling at full capacity (12,000 units), has the following sales and cost structure: $\begin{array}{llcc}
  \text { Sales price per unit } &\$45.00  \
 \text { Variable costper unit } &22.50\
 \text {Fixed cost (at capacity) per unit  } &15.00\
\end{array}$

If the Overseas Division meets the outside supplier's price and sells the 10,000 widgets to National, the effect on overall company profits will be
A) $150,000 lower
B) $300,000 higher
C) $ 75,000 higher
D) $225.000 lower

Quizplus · Accepted Answer

The Overseas Division is at full capacity, so selling to National means losing external sales. The contribution margin per unit is $22.50 ($45 - $22.50). Selling 10,000 units to National at $30 results in a $15,000 loss per unit compared to external sales, leading to a total profit decrease of $150,000 (10,000 units x $15).

The National Division of RedBubble Ltd Is Buying 10,000 Widgets