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1)Epsilon has two divisions, P and Q. Division P makes a component which it can sell only to Division Q.
Current information for division P is as follows:
Marginal cost per unit $240
Transfer price of component $396
Total production and sales per year 4000 units
Specific fixed costs of division P $ 24,000 per yearAlpha Co has offered to sell the component to division Q for $350 per unit. If division Q accepts this offer, division P will be closed.
If division Q accepts alpha Co’s offer, what will be the impact on profits per year for the group as a whole?
The company overall is currently paying $240 per unit to produce the component.
If instead, the component is purchased from Alpha it will cost $350 – and extra $110 per unit.
So for 4,000 units it will cost them an extra $440,000 a year.However, since Q will be closed, then the company will save $24,000 a year.
So the impact on profits of the overall company is that they will fall by 440,000 – 24,000 = $416,000.
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