Answer:
Total increase in operating income = $1.80 [tex]\times[/tex] 40,000 units = $72,000.
Explanation:
Division 6 can produce the product required by Division 3 at the variable cost of $3.00 since it has an ideal capacity left, thus no other fixed cost will be incurred.
Further provided Division 3 buys it from outside suppliers at the rate of $5.00, now it can buy from Division 6 at the rate of $3.20 per unit.
Therefore it will save about $5.00 - $3.20 = $1.80 per unit, which will increase its operating income with the same, therefore
Total increase in operating income = $1.80 [tex]\times[/tex] 40,000 units = $72,000.
