Reference no: EM132561015
The Barney Company has a producing division, which is currently producing 100,000 units but has a capacity of 150,000 units. The variable cost of the product is 20 per unit, and the total fixed costs are 900,000 or 9.00 per unit based on current production.
A selling division of the Barney Company offers to buy 50,000 units from the producing division at 19.00 per unit. The producing division manager refuses the order because the price is below variable cost.
A selling division manager argues that the order should be accepted since taking the order; the producing division manager can lower the fixed cost per unit from 9.00 to 6.00 (900,000/150,000). This decrease of 3.00 in fixed cost per unit will more than offset the 1.00 difference between the variable cost and the transfer price.
Question 1. If you were the producing division manager, would you accept the selling division manager's arguments? Why or why not? (Assume that the 100,000 units currently being produced sell for 35 in the external market).
Question 2. From the viewpoint of the overall company, should the order be accepted if the manager of the selling division intends to sell each unit in the outside market for 30 after incurring additional processing costs of 3.50 and selling cost of 2.50 per unit and assuming that the idle capacity of the producing division cannot be used for other activities and the units be acquired from outside suppliers.
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