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: Sales price per unit $45.00
Variable cost per unit 22.50
Fixed cost (at capacity)per unit 15.00
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

Quizplus · Accepted Answer

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

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