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What will be the impact on profit company profit

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Question - Profit Company has two divisions, Sellfast and Buybig. Buybig Division has been selling 350,000 units of a sub-component referred to as Part 94 every year to outside companies at £136 per unit. Sellfast Division needs 190,000 units of Part 94 this year. Sellfast Division has been buying Part 94 from outside suppliers for £130 each but it has now offered to pay Buybig Division £104 per unit. The Divisional Manager of Buybig Division is not enthusiastic but has said she will consider the offer. The production capacity available to Buybig Division is 595,000 units of Part 94 per year. The Divisional Manager works out that at the normal volume of 350,000 of Part 94 per year, the production costs per unit incurred are as follows:

Direct materials £38

Direct labour 21

Variable factory overhead 13

Fixed factory overhead 32

Total £104

Required -

(a) Do you think the Buybig Divisional Manager should accept the offer from Sellfast Division? Show all calculations.

(b) If Buybig's Divisional Manager accepts the offer from Sellfast Division, what will be the impact on Profit Company's profit? Show all calculations.

(c) Whether or not Buybig's Divisional Manager agrees to supply to Sellfast Division, should the Profit Company's Chief Executive Officer get involved in this decision?

(d) What would be the price range within which negotiations between the two division could take place?

Reference no: EM132981848

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