North Division sells cloth internally to South Division.South Division uses the cloth to produce inexpensive curtains sold at discount stores.North Division incurs costs of $1.50 per pound, while South Division incurs additional costs of $4.80 per pound.The product is sold to external customers for $8.00 per set of curtains.Identify which of the following formulas correctly reflects the company's operating income.
A)$8.00 - $1.50 = $6.50
B)$8.00 - $4.80 = $3.20
C)$8.00 - $1.50 + $6.30) = $0.20
D)$8.00 - $1.50 + $4.80) = $1.70

Question

Quizplus · Accepted Answer

The operating income formula is revenue minus cost of goods sold (COGS), where COGS includes all direct costs associated with producing the product.

For North Division, the COGS is $1.50 per pound. However, since they are selling the cloth to South Division and not to external customers, they do not contribute directly to the revenue.

For South Division, the COGS is the cost of the cloth ($1.50 per pound) plus additional costs of $4.80 per pound. This means the total COGS per pound for South Division is $6.30.

The revenue from selling the curtains is $8.00 per set.

Therefore, the correct operating income formula is:

Revenue - COGS 
$8.00 - ($1.50 + $4.80) 
= $8.00 - $6.30 
= $1.70

So, the best choice is option D.

North Division Sells Cloth Internally to South Division