The Pillar Division of the Gothic Building Company Produces Basic

question 99

Multiple Choice

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:

• A) $1,250 decrease.
• B) $10,250 increase.
• C) $1,000 decrease.
• D) $13,750 decrease.

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Definitions:

Interest Rate

The percentage of a sum of money charged for its use, typically expressed on an annual basis, serving as a key parameter in financial transactions.

Present Value

The present value of a future amount of money or series of cash flows, considering a particular return rate.

Interest Rate

The percentage of the principal charged by a lender for the use of its money or the rate at which interest is paid by a borrower for the use of money.

Consumes

The action of using up a good or service, typically resulting in a decrease in available quantity.