Question
Alpha Division of Craft Corporation produces electric motors, 20% of which are sold to Craft's Alpha division and 80% to outside customers. Craft treats is
Alpha Division of Craft Corporation produces electric motors, 20% of which are sold to Craft's Alpha division and 80% to outside customers. Craft treats is divisions as profit centers and allows division managers to choose whether to sell or buy from internal divisions. Corporate policy requires that all interdivisional sales and purchases be transferred at variable cost. Gamma division estimates sales and standard cost data for the year ended December 31, based on a capacity of 60,000 units, are as follows:
ALPHA DIVISION | OUTSIDERS | |
SALES | $660,000 | $5,760,000 |
less variable costs | 660,000 | 2,640,000 |
contribution margin | --- | 3,120,000 |
less fixed costs | 175,000 | 900,000 |
operating income (loss) | (175,000) | 2,220,000 |
unit sales | 12,000 | 48,000 |
Alpha has an opportunity to sell the 12,000 units shown above to an outside customer at $80 per unit. Alpha can purchase the units it needs from an outside supplier at $92 each.
Required: Assuming that alpha desires to maximize operating income, should it take on the new customer and discontinue sales to Omega? Why? (please answer this from Gamma's perspective).
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