Veritron Division of Argos Incorporated Has a Capacity of 100,000

question 54

Essay

Veritron Division of Argos Incorporated has a capacity of 100,000 units and expects the following results for the year:
$$\begin{array} { l r } \text { Sales } ( 90,000 \text { units at } \$ 30 ) & \$ 2,700,000 \\\text { Variable costs, at } \$ 20 & 1,800,000 \\\text { Fixed costs } & \underline{700,000} \\\text { Income } &\underline{ \$ 200,000}\end{array}$$
Magnatron Division of Argos Incorporated currently purchases 20,000 units of a part for one of its products from an outside supplier at $32 per unit. Magnatron's manager believes she could use a minor variation of Veritron's product instead and offers to buy the units from Veritron for $26 per unit. Making the variation desired by Magnatron would cost Veritron an additional $5 per unit and would increase Veritron's annual cash fixed costs by $80,000. Veritron's manager agrees to the deal offered by Magnatron's manager.
Required:
(a) What is the effect of the deal on Magnatron's income?
(b) What is the effect of the deal on Veritron's income?
(c) What is the effect of the deal on the income of Argos Incorporated as a whole?

---

Definitions:

Market Value

The current price at which an asset or service can be bought or sold in the market, not necessarily equal to the book value.

Callable Bonds

Bonds that can be redeemed by the issuer before their maturity date at a specified call price.

Issuing Corporation's Common Stock

The process by which a corporation releases its own shares of stock to the public for the first time or through subsequent offerings.

Long-term Notes

Debt obligations with a maturity of more than one year, used by companies to finance operations or major purchases.