The Barrel Division of Chemco Inc.has a capacity of 200,000 units and expects the following results.$$\begin{array} { | l | r | }
\hline \text { Sales } ( 160,000 \text { units at } \$ 4 ) & \$ 640,000 \
\hline \text { Variable costs, at } \$ 2 & 320,000 \
\hline \text { Fixed costs } &\underline{ 260,000} \
\hline \text { Income } & \$ 60,000 \
\hline
\end{array}$$ Tank Division of Chemco Inc.currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit.The Tank Division's manager believes he could use a minor variation of the Barrel Division's product instead,and offers to buy the units from the Barrel Division at $3.50.Making the variation desired by the Tank Division would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel Division's annual cash fixed costs by $20,000.Barrel's manager agrees to the deal offered by Tank's manager.Required:
a.What is the effect of the deal on the Tank Division's income?
b.What is the effect of the deal on the Barrel Division's income?
c.What is the effect of the deal on the income of Chemco Inc.as a whole?

Question

The Barrel Division of Chemco Inc.has a capacity of 200,000 units and expects the following results.$$\begin{array} { | l | r | } 
\hline \text { Sales } ( 160,000 \text { units at } \$ 4 ) & \$ 640,000 \
\hline \text { Variable costs, at } \$ 2 & 320,000 \
\hline \text { Fixed costs } &\underline{ 260,000} \
\hline \text { Income } & \$ 60,000 \
\hline
\end{array}$$ Tank Division of Chemco Inc.currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit.The Tank Division's manager believes he could use a minor variation of the Barrel Division's product instead,and offers to buy the units from the Barrel Division at $3.50.Making the variation desired by the Tank Division would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel Division's annual cash fixed costs by $20,000.Barrel's manager agrees to the deal offered by Tank's manager.Required:
a.What is the effect of the deal on the Tank Division's income?
b.What is the effect of the deal on the Barrel Division's income?
c.What is the effect of the deal on the income of Chemco Inc.as a whole?

Quizplus · Accepted Answer

The Answer of The Barrel Division of Chemco Inc.has a capacity of 200,000 units and expects the following results.$$\begin{array} { | l | r | } 
\hline \text { Sales } ( 160,000 \text { units at } \$ 4 ) & \$ 640,000 \
\hline \text { Variable costs, at } \$ 2 & 320,000 \
\hline \text { Fixed costs } &\underline{ 260,000} \
\hline \text { Income } & \$ 60,000 \
\hline
\end{array}$$ Tank Division of Chemco Inc.currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit.The Tank Division's manager believes he could use a minor variation of the Barrel Division's product instead,and offers to buy the units from the Barrel Division at $3.50.Making the variation desired by the Tank Division would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel Division's annual cash fixed costs by $20,000.Barrel's manager agrees to the deal offered by Tank's manager.Required:
a.What is the effect of the deal on the Tank Division's income?
b.What is the effect of the deal on the Barrel Division's income?
c.What is the effect of the deal on the income of Chemco Inc.as a whole?

The Barrel Division of Chemco Inc Tank Division of Chemco Inc