The Barrel Division of Chemco Incorporated Has a Capacity of 200,000

The Barrel Division of Chemco Incorporated has a capacity of 200,000 units and expects the following results in the coming period:
$$\begin{array} { l r } \text { Sales } ( 160,000 \text { urits at } \$ 4 ) & \$ 640,000 \\\text { Variable costs, at } \$ 2 & 320,000 \\\text { Fixed costs } &\underline{ 260,000 }\\\text { Income } & \underline{\$ 60,000}\end{array}$$
The Tank Division of Chemco Incorporated currently purchases 50,000 units of a part for one of its products from an outside supplier for $4 per unit. The Tank Division's manager believes he could use a minor variation of the Barrel Division's product instead and offers to buy the units from the Barrel Division for $3.50 per unit. Making the variation desired by the Tank Division would cost the Barrel Division an additional $0.50 per unit and would increase the Barrel Division's annual cash fixed costs by $20,000. The Barrel Division's manager agrees to the deal offered by the Tank Division's manager.
Required:
(a) What is the effect of the deal on the Tank Division's income?
(b) What is the effect of the deal on the Barrel Division's income?
(c) What is the effect of the deal on the income of Chemco Incorporated as a whole?

Correct Answer:

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(a)50,000 units × ($4 current price ? $3...

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