The Lawnman Corporation, the manufacturer of Easyrider lawnmowers, is a highly decentralized company. Each division manager has full authority for sourcing decisions. The Engine Division of produces the engine for the lawnmower and the Assembly Division produces the lawnmower. There is a market for the engine as well as the lawnmower. Each of the divisions has been designated as a profit center. The Assembly Division has always purchased 1,000 engines annually from the Engine Division. The Engine Division announced it is increasing it’s transfer price to $350. In response, the Assembly Division was able to locate an external supplier that can provide the required engines for $280 per unit. The Engine Division has an annual production capacity of 1,000 units. Their incremental (variable) cost of producing each engine is $240 and fixed costs are $70. If the Engine Division does not produce the 1,000 engines, the equipment and facilities would be used for other production operations that would result in annual cash-operating savings of $60,000. Should the Assembly Division purchase from the external supplier? Why?

A) No. Because if the engines are purchased from the external supplier, the net cost to the company as a whole will be $40,000.

B) No. Because if the engines are purchased from an external supplier, the net cost to the company as a whole will be $20,000.

C) Yes. Because if the engines are purchased from the external supplier, the net benefit to the company as a whole will be $40,000.

D) Yes. Because if the engines are purchased from the external supplier, the net benefit to the company as a whole will be $20,000.

 

I know the answer is D; I need to understand how the net benefit is $20,000. Thanks!