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

Question

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

Quizplus · Accepted Answer

The Overseas Division is at full capacity, so selling to National would mean losing sales at $45 per unit. The contribution margin lost is $22.50 per unit ($45 - $22.50). For 10,000 units, this results in a $225,000 loss in contribution margin. However, National saves $30 per unit by not buying from the outside supplier, totaling $300,000. The net effect is a $75,000 loss ($225,000 - $300,000), making the overall company profits $150,000 lower.

The National Division of Roboto Company Is Buying 10,000 Widgets