Tuttle Motorcycles Inc.manufactures and sells high-priced motorcycles.The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division.It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit.The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively.The Production Division is currently paying $2,400 per unit to an outside supplier.$90 per unit can be saved on internal sales from reduced selling expenses.
-What is the increase/decrease in overall company profits if this transfer takes place?

Question

Quizplus · Accepted Answer

The Engine Division loses $1,500 per unit in contribution margin ($2,550 - $1,050) on 20,000 units, totaling a decrease of $30,000,000. The Production Division saves $1,350 per unit ($2,400 - $1,050) plus $90 in selling expenses, totaling an increase of $27,000,000. The net effect is a decrease of $3,000,000.