The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to buy 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { ll}
\text { Capacity in units } & 300,000 \text { pillars } \
\text { Selling price per pillar to outside customers } & \$ 1.75 \
\text { Variable costs per pillar } & \$ 0.90 \
\text { Fixed costs, total } & \$ 150,000
\end{array}$$

The total fixed costs would be the same for all the alternatives considered.
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Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each. If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar 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 Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company. The Lantern Division wants to buy 25,000 pillars from the Pillar Division. The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { ll} 
\text { Capacity in units } & 300,000 \text { pillars } \
\text { Selling price per pillar to outside customers } & \$ 1.75 \
\text { Variable costs per pillar } & \$ 0.90 \
\text { Fixed costs, total } & \$ 150,000
\end{array}$$

The total fixed costs would be the same for all the alternatives considered.
-
Suppose the transfers of pillars to the Lantern Division would reduce sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each. If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar 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 Pillar Division would lose the contribution margin on the 15,000 units not sold to outside customers, which is $0.85 per unit ($1.75 - $0.90), totaling $12,750. However, the company saves $11,750 by buying 25,000 units from the outside supplier at $1.45 instead of $1.75, resulting in a net decrease of $1,000 ($12,750 - $11,750).

The Pillar Division of the Gothic Building Company Produces Basic