The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | }
\hline \text { Capacity in units } & \begin{array} { r }
300,000 \
\text { pillars }
\end{array} \
\hline \text { Selling price per pillar to outside } & \$ 1.75 \
\text { customers } & \
\hline \text { Variable costs per pillar } &\$ 0.90 \
\hline \text { Fixed costs, total } &\$ 150,000\
\hline
\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each.If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar Division,the change in net operating income for the company as a whole would have been:

Question

The Pillar Division of the Gothic Building Company produces basic pillars which can be sold to outside customers or sold to the Lantern Division of the Gothic Company.Last year,the Lantern Division bought all of its 25,000 pillars from Pillar at $1.50 each.The following data are available for last year's activities of the Pillar Division:
$$\begin{array} { | l | r | } 
\hline \text { Capacity in units } & \begin{array} { r } 
300,000 \
\text { pillars }
\end{array} \
\hline \text { Selling price per pillar to outside } & \$ 1.75  \
\text { customers } &  \
\hline \text { Variable costs per pillar } &\$ 0.90  \
\hline \text { Fixed costs, total } &\$ 150,000\
\hline
\end{array}$$ The total fixed costs would be the same for all the alternatives considered below.Suppose the transfers of pillars to the Lantern Division cut into sales to outside customers by 15,000 units.Further suppose that an outside supplier is willing to provide the Lantern Division with basic pillars at $1.45 each.If the Lantern Division had chosen to buy all of its pillars from the outside supplier instead of the Pillar Division,the change in net operating income for the company as a whole would have been:

Quizplus · Accepted Answer

If the Lantern Division buys from the outside supplier, the Pillar Division can sell 15,000 more units to outside customers at $1.75 each, generating additional revenue of $26,250. However, the cost of producing these 15,000 units is $13,500 (15,000 units x $0.90 variable cost), resulting in an additional contribution margin of $12,750. The Lantern Division would save $1,250 by buying from the outside supplier ($1.50 - $1.45 = $0.05 savings per unit x 25,000 units). The net change in operating income is $12,750 (additional contribution margin) - $1,250 (savings) = $11,500 increase. However, since the question asks for the change in net operating income for the company as a whole, the correct answer is a $1,000 decrease, as the Pillar Division loses the internal sales margin of $0.60 per unit on 25,000 units, which is $15,000, offset by the $13,750 gain from selling 15,000 units externally.

The Pillar Division of the Gothic Building Company Produces Basic