Reference no: EM131216107
Stanco Inc. has two divisions, Electronics and Clocks. The Electronics Division (which is operating at capacity) , makes a specialized circuit borad called SA5 which it sells to its regular customers for $14 each. SA5 has a variable production cost of $8.25 per unit and a fixed production cost of $1.50 per unit. The clocks division developed a new product for which it needs to use SA5 as a component part. The cost of the Clock Division's new product follows :
SA5 circuit board (desired cost) : $9.00
Other purchased Parts (from outside vendors) : $30.00
Other Variable Costs : $20.75
Allocated Fixed Overhead and Admin Costs : $10.00
Total Cost Per Timing Device : $69.75
The manager of the Clock Division feels that to successfully market the new product she can't quote a price greater than $70 per unit. To keep the price at $70 or less, she can't pay more than $9 per unit to the Electronics Division for each unit of SA5.
Question : Suppose the total demand for the new product is expected to reach 10,000 units. If the Electronics Division agrees to transfer the needed SA5's at $9 per unit for the sales of the new product at $70 per unit, how much will the whole company's profitability increase or decrease?
A) Decrease by $35,000 B) Increase by $67,500 C) Increase by $52,500 D) Decrease by $7,500 E) None
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