The Machining Division Is Currently Operating at Capacity (2,000 Units)

question 104

Multiple Choice

The Machining Division is currently operating at capacity (2,000 units) . Its sales and cost data are: $$\begin{array} { l r } \text { Selling price per unit } & \$ 100 \\\text { Variable manufacturing costs per unit } & \$ 25 \\\text { Variable administrative costs per unit } & \$ 5 \\\text { Total fixed manufacturing overhead } & \$ 20,000 \\\text { Total fixed administrative costs } & \$ 5,000\end{array}$$ If the Assembly Division is currently buying from an outside supplier at $98 per unit, what will be the effect on overall company profits if internal sales of 2000 units from Machining to Assembly take place at the optimum transfer price?

• A) $7,000 increase
• B) $4,000 decrease
• C) $300 increase
• D) There is no effect

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Definitions:

Degree of Operating Leverage

A measure of how sensitive a company's operating income is to a change in sales, indicating the proportion of fixed costs in the business's cost structure.