Division A of Spangler Company expects the following results: To Division B To OutsidersSales (5,000 × $60)$300,000 (25,000 × $72) $1,800,000 Variable costs at $36 180,000 900,000 Contribution margin$120,000 $900,000 Fixed costs, all common, allocated on the basis of relative units 60,000 300,000 Profit$60,000 $600,000 Division B has the opportunity to buy the 5,000 units it needs from an outside supplier at $45 each.Required (consider each question independently):(a) Division A refuses to meet the $45 price, sales to outsiders cannot be increased, and Division B buys from the outside supplier. Compute the effect on the income of Spangler Company.(b) Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B
continues to buy from Division A. Compute the effect on the income of Spangler Company.
What will be an ideal response?
(a)
5,000 units × ($45 outside price ? $36 variable cost) = $45,000 decrease.
(b)
No change. Division A will show less profit, but B will show an equal amount of increased profit.
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