E8-12 The Cycle Division of Ayala Company has the following per unit data related to its most recent cycle called Roadbuster.

 

Selling price	Â	Â	$2,200
Variable cost of goods sold	Â	Â	Â
Body frame	$300	Â	Â
Other variable costs	900	Â	1,200
Contribution margin	Â	Â	$1,000

Presently, the Cycle Division buys its body frames from an outside supplier. However Ayala has another division, FrameBody, that makes body frames for other cycle companies. The Cycle Division believes that FrameBody’s product is suitable for its new Roadbuster cycle. Presently, FrameBody sells its frames for $350 per frame. The variable cost for FrameBody is $270. The Cycle Division is willing to pay $280 to purchase the frames from FrameBody.

Instructions

(a)  Assume that FrameBody has excess capacity and is able to meet all of the Cycle Divi- sion’s needs. If the Cycle Division buys 1,000 frames from FrameBody, determine the following: (1) effect on the income of the Cycle Division; (2) effect on the income of FrameBody; and (3) effect on the income of Ayala.

(b)  Assume that FrameBody does not have excess capacity and therefore would lose sales if the frames were sold to the Cycle Division. If the Cycle Division buys 1,000 frames from FrameBody, determine the following: (1) effect on the income of the Cycle Divi- sion; (2) effect on the income of FrameBody; and (3) effect on the income of Ayala.