Reference no: EM132815172
Question - Truball Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since division B plans to increase its selling price for the same materials to $200. Information for division A and division B follows:
Outside price for materials $110
Division A's annual purchases 6,000 units
Division B's variable costs per unit $100
Division B's fixed costs, per year $1,170,000
Division B's capacity utilization 100%
Required -
1. Assume that division B cannot sell its materials to outside buyers. Calculate the net cost or benefit to the company as a whole if Division A purchases the materials outside the company.
2-a. Assume that division B can save $150,000 in fixed costs if it does not manufacture the material for Division A. Calculate the net cost or benefit to the company as a whole for A to purchase outside the company.
2-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market?
3-a. Assume the situation in Requirement 1. If the outside market value for the materials drops $16, calculate the net cost or benefit to the company as a whole for A to purchase outside the company.
3-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market?
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