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Managerial Accounting

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Moderate

Calculating Profit Advantage or Disadvantage

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The American Division of MLB Co. has been the major supplier of the 2,000 components that the National Division needs each year. The National Division, however, has just announced that it intends to buy all its components in the coming year from two external suppliers at \$200 per unit. The American Division recently increased its price for the next year from \$200 to \$225 per unit. The American Division has no alternative use for the facilities used to manufacture these components.

The incremental costs per unit that MLB incurs to produce each component are the American Division's variable cost of \$190. The fixed cost per unit in the American Division amounts to \$28.

Determine the profit advantage (or disadvantage) to MLB Co. of buying from the American Division.

A

$36,000 disadvantage

B

$50,000 disadvantage

C

$20,000 advantage

D

$106,000 disadvantage