D Incorporated operates three divisions in their company. Division 1 manufactures Product X, Division 2 manufactures Product Y while Division 3 manufactures Product Z.

Each Unit of Product Y requires two units of Product X while each unit of Product Z requires 3 units of Product Y. Costs related to these products are as follows:

Product X

Product Y

Product Z

Selling Price

15 per unit

75 per unit

500 per unit

Direct Materials

4 per unit

20 per unit

180 per unit

Direct Labor

3 per unit

25 per unit

100 per unit

Variable Factor Overhead

2 per unit

10 per unit

50 per unit

Fixed Overhead (at normal capacity)

1 per unit

5 per unit

30 per unit

Variable Selling and Admin. Expense

0.50 per unit

2 per unit

10 per unit

Fixed Selling and Admin Expense

50,000 annually

50,000 annually

50,000 annually

Annual Production and Sales

200,000 units

25,000 units

1,000 units

Normal Capacity

275,000 units

30,000 units

1,500 units

At present, Division 2 acquires Product X from outsiders at 10 per unit while Division 3 acquires Product Y from outsiders at 60 per unit.

D Incorporated aims to be a self-sustaining company, as such, they are now planning to acquire the primary components of their product from their divisions.

The Division 2 manager offers to buy all their production requirement of Product X from Division 1 at 9 per unit, citing the saying "Blood is thicker than water" as reason for such offer. Division 1 would not be incurring selling expense if they accept the offer.

The Division 3 manager was eavesdropping all throughout the time that the Division 2 manager was negotiating with the Division 1 manager. Just like the Division 2 manager, the Division 3 manager also made an offer to buy Product Y from Division 2 at 50 per unit. The Division 3 manager, a certified copycat, used the same reason when making the offer to Division 2 manager. To further strengthen his offer, he added the saying "Charity begins at home". Just like Division 1, they won't be incurring selling and administrative expense when they accept the offer.

What would happen to the company's operating income if Division 1 accepts the offer of Division 2 but Division 2 rejects the offer of Division 3?

a.

Operating income would increase by 50,000

b.

Operating income would increase by 100,000

c.

Answer not among the choices

d.

Operating income will not be affected

e.

Operating income would decrease by 300,000

f.

Operating income would decrease by 45,000