Question

Internal or External Acquisitions: No Opportunity Costs

The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for $38 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

Direct materials	$ 13
Direct labor	10
Variable overhead	6
Fixed overhead	15
Total	$ 44

The Wheel Division has been selling 500,000 wheels per year to outside buyers at $53 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $50 per wheel.

(a) Should the Wheel Division manager accept the offer?
     Calculate the net benefit (or cost) to the Wheel Division of accepting the offer from the Van Division.
     $Answer per wheel

(b) From the standpoint of the company, will the internal sale be beneficial?
     Calculate the net benefit (or cost) to Motocar Corp. if the Wheel Division accepts the offer from the Van Division.
     $Answer per wheel

Answer 1

Part-a: Statement showing Benefit /(Cost ) to Wheel Division by accepting the offer of Van Divsion
	Amount	Amount
Direct Material	$13.00
Direct Labour	$10.00
Variabel overhead	$6.00
Total Variable Overhad Cost (a)		$29.00
Offer Price (B)		$38.00
Net Benfit (B-A)		$9.00
Part-a: Statement showing Benefit /(Cost ) to Company   by accepting the offer of Van Divsion
		Amount
Purchase Price from outside		$50.00
Less: Offer Price		$38.00
Benefit to Van Division		$12.00
Add: benefit for Wheel Division		$9.00
Total Benefit to Company as whole		$21.00