Giga-Stuff, Inc Sophistosand Has the Capacity to Make 400,000 Units of Component

question 2

Multiple Choice

Giga-Stuff, Inc.Giga-Stuff, Inc. has a number of divisions. One division, Sophistosand, makes component X, which is used in the manufacture of DVD players. Another division, Videostuff, makes DVD players and needs 60,000 units of component X per year. Sophistosand incurs the following costs for one unit of component X: $$\begin{array} { l l } \text { Direct materials } & \$ 0.30 \\\text { Direct labour } & 0.15 \\\text { Variable overhead } & 0.70 \\\text { Fixed overhead } & \underline { 1.00 } \\\text { Total } & \underline { \$ 2.15 }\end{array}$$ Sophistosand has the capacity to make 400,000 units of component X per year but, due to a soft market, plans to produce and sell only 320,000 units next year. Videostuff currently buys component X from an outside supplier for $2.50 each (the same price that Sophistosand receives) .
-Refer to Giga-Stuff, Inc. Assume that Sophistosand and Videostuff have agreed on a transfer price of $2.20. What are the total cost savings for Videostuff?

• A) $18,000
• B) $63,000
• C) $69,000
• D) $81,000

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