Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year:
$\begin{array}{lrr}
\text { Sales }(50,000 \text { units at } \$ 20) & \$ 1,000,000 \
\text { Variable costs } & 600,000 \
\text { Contribution margin } & \$ 400,000 \
\text { Fixed costs } & 250,000 \
\text { Profit } & \$ 150,000
\end{array}$
Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell the component to Genesis at a price of $6. Solar is operating well below capacity.
Required:
(a) If Genesis accepts the offer, what will happen to the income of the Solar Division?
(b) If Genesis accepts the offer, what will happen to the income of the Genesis Division?
(c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?

Question

Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year:
 $\begin{array}{lrr}
\text { Sales }(50,000 \text { units at } \$ 20) & \$ 1,000,000 \
\text { Variable costs } & 600,000 \
\text { Contribution margin } & \$  400,000 \
\text { Fixed costs } &  250,000 \
\text { Profit } & \$ 150,000
\end{array}$ 
Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell the component to Genesis at a price of $6. Solar is operating well below capacity.
Required:
(a) If Genesis accepts the offer, what will happen to the income of the Solar Division?
(b) If Genesis accepts the offer, what will happen to the income of the Genesis Division?
(c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?

Quizplus · Accepted Answer

The Answer of Trevor Company operates several investment centers. The manager of the Genesis Division expects the following results for the coming year:
 $\begin{array}{lrr}
\text { Sales }(50,000 \text { units at } \$ 20) & \$ 1,000,000 \
\text { Variable costs } & 600,000 \
\text { Contribution margin } & \$  400,000 \
\text { Fixed costs } &  250,000 \
\text { Profit } & \$ 150,000
\end{array}$ 
Included in the Genesis Division's variable cost is $7 for a component it buys from an outside supplier. One of these components is required in each unit of the Genesis Division's product. The manager of the Genesis Division has just found that she can buy the component from the Solar Division, another division of Trevor Company. The Solar Division sells 300,000 units of the component to outsiders at $8 and its variable cost is $4 per unit. The Solar Division offers to sell the component to Genesis at a price of $6. Solar is operating well below capacity.
Required:
(a) If Genesis accepts the offer, what will happen to the income of the Solar Division?
(b) If Genesis accepts the offer, what will happen to the income of the Genesis Division?
(c) If Genesis accepts the offer, what will happen to the income of the Trevor Company?

Trevor Company Operates Several Investment Centers Included in the Genesis Division's Variable Cost Is $7 for Genesis