Epsilon Mock Exam Question

Referring to the Open Tuition mock exam question for Epsilon, can you provide a breakdown of how we arrive at the answer ‘Decrease of $416,000’ please?

—–

Epsilon has two divisions, P and Q. Division P makes a component that it only sells to Division Q.

Current information for division P is as follows:

Marginal cost per unit $240
Transfer price of the component $396
Total production and sales per year 4,000 units
Specific fixed costs of Division P $24,000 per year

Alpha 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?

—–

Thank you in advance! 🙂