Question

The Wheel Division of Frankov Corporation has the capacity for making 85,000 wheel sets per year and regularly sells 74,000 each year on the outside market. The regular sales price is $114 per wheel set, and the variable production cost per unit is $84. The Retail Division of Frankov Corporation currently buys 44,000 wheel sets (of the kind made by the Wheel Division) yearly from an outside supplier at a price of $104 per wheel set. If the Retail Division were to buy the 44,000 wheel sets it needs annually from the Wheel Division at a transfer price of $92 per wheel set, the change in annual net operating income for the company as a whole would be:

Multiple Choice

• $880,000.

• $129,000.

• $740,000.

• $550,000.

Answer 1

wheel Division
Particulars	Amount (in $)
Sales (44,000 sets x $92)	$4,048,000
Less: variable Cost (44,000 sets x $84)	($3,696,000)
Profit	$352,000

Retail Division
Particulars	Amount (in $)
Purchases from outside Supplier (44,000 sets x $104)	$4,576,000
Purchases from wheel Division internally (44,000 sets x $92)	($4,048,000)
Amount of Savings	$528,000
Additional Profit of P Division	$352,000
Change in Net operating Income	$880,000
option (a ) is correct,i.e.,$880,000