Reference no: EM132596171

Question 1: Carmine Company uses 4,000 units of a product each year. The cost of manufacturing one unit at this volume is as follows:

Direct materials $10.00

Direct labor 14.00

Variable overhead 5.00

Fixed overhead 3.00

Total $32.00

An outside supplier has offered to sell Carmine Company unlimited quantities at a unit cost of $30.00. If

Carmine Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned to the product. Furthermore, the space devoted to the manufacture of the product would be rented to another company for $18,000 per year. If Carmine Company accepts the offer of the outside supplier, annual profits will:

a. increase by $26,000.

b. increase by $16,000.

c. increase by $20,000.

d. decrease by $20,000.

Question 2: The operations of Erin Corporation are divided into the Coral Division and the Cyan Division. Projections for the next year are as follows:

                                 Coral                   Cyan

                                         Division            Division                Total

Sales                           $215,000            $126,000     $341,000

Variable costs                   75,500              55,000         130,500

Contribution margin             $139,500          $ 71,000      $210,500

Direct fixed costs                60,000                50,000           110,000

Segment margin                    $ 79,500            $ 21,000       $100,500

Allocated common costs            32,000              40,000          72,000

Operating income (loss)                $ 47,500            $(19,000)   $ 28,500

Operating income for Erin Corporation as a whole if the Cyan Division were dropped would be:

a. $7,500.

b. $47,500.

c. $(2,500).

d. $(42,500).