Reference no: EM132968802

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 $180
Division A's annual purchases 13,000 units
Division B's variable costs per unit $170
Division B's fixed costs, per year $1,310,000
Division B's capacity utilization 100%

Required:

Problem 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.

Problem 2-a. Assume that division B can save $220,000 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.

Problem 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? (Y or N)

Problem 3-a. Assume the situation in Requirement 1. If the outside market value for the materials drops $23, calculate the net cost or benefit to the company as a whole for A to purchase outside the company.

Problem 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?