Question

The Cycle Division of Ayala Company has the following per unit data related to its most recent cycle called Roadbuster.

Selling price $2,210
Variable cost of goods sold
Body frame $305
Other variable costs 904 1,209
Contribution margin $1,001

Presently, the Cycle Division buys its body frames from an outside supplier. However Ayala has another division, FrameBody, that makes body frames for other cycle companies. The Cycle Division believes that FrameBody's product is suitable for its new Roadbuster cycle. Presently, FrameBody sells its frames for $352 per frame. The variable cost for FrameBody is $262. The Cycle Division is willing to pay $275 to purchase the frames from FrameBody.

Assume that FrameBody has excess capacity and is able to meet all of the Cycle Division's needs. If the Cycle Division buys 1,050 frames from FrameBody, determine the following:

(1) Effect on the income of the Cycle Division
(2) Effect on the income of FrameBody

Answer 1

Answer:

There will be an increase in the net income of $30 per unit and  $ 1082550-$ 1051050= $ 31,500  for 1050 units if Ayala Company buys body frame from Frame Body.

There will be a loss of $ 90-13= $ 77 per unit and $ 77 * 1050= $ 80,850 if Frame body sells its body frames to Ayala for $ 275 instead of $ 352.

Explanation:

Ayala Company

Selling price $2,210

Variable cost of goods sold   1,209

Body frame $305

Other variable costs 904

Contribution margin $1,001*1050= $ 1051050

Ayala Company

Selling price $2,210

Variable cost of goods sold   1,179

Body frame $275

Other variable costs 904

Contribution margin $1,031*1050= $ 1082550

There will be an increase in the net income of $30 per unit and  $ 1082550-$ 1051050= $ 31,500  for 1050 units if Ayala Company buys body frame from Frame Body.

FrameBody

Selling price $ 352

Variable cost of goods sold  

Body frame $262

Contribution margin $ 90 per unit

FrameBody

Selling price $ 275

Variable cost of goods sold  

Body frame $262

Contribution margin $ 13 per unit

There will be a loss of $ 90-13= $ 77 per unit and $ 77 * 1050= $ 80,850 if Frame body sells its body frames to Ayala for $ 275 instead of $ 352.

Answer 2

Answer:

1. Income of Cycle Division shall increase by $ 31,500

2. Income of Framebody division shall increase by $ 13.650 on sales made to cycle division

Explanation:

Computation on Impact of Income of Cycle Division

Cost of Frames from Framebody Division $ 275

Cost of frames from outside supplier $ 305

Savings in purchases $ 30

Total Units 1,050

Total savings and impact on Income $ 31,500

Computation on Impact of Income of Framebody Division

Sales value to Cycle division                $ 275

Variable Costs per cycle                       $ 262

Contribution Margin                               $   13

Total Units                                               1,050

Total income on sales to Cycle Division $ 13,650