We Heart Cows makes animal-free jackets. The Fabric Division makes the faux leat
ID: 2580976 • Letter: W
Question
We Heart Cows makes animal-free jackets. The Fabric Division makes the faux leather that is used by the Jacket Division. Product cost per yard for the fabric is:
The Jacket Division needs 28,000 yards of fabric annually. Currently, the Jacket Division purchases fabric from an outside supplier for $4.50 per yard, because the Fabric Division has been selling all of their fabric to external buyers for $4.50 per yard. This year, the Fabric Division has lost a major customer and has capacity to fill the Jacket Division’s demand. The managers of the two divisions negotiate a mutually agreeable transfer price of $4.25 per yard. Compute the total cost savings for the Jacket Division.
A : $7,000
B : $6,000
C : $5,000
D : $4,500
Explanation / Answer
A : 7000
COST TO JACKET DIVISION
*) Normal purchasing cost (from outside) = 4.5×28000=126000
*)if purchase from fabrig segment = 4.25×28000=119000
TOTAL SAVINGS =126000-119000= 7000
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