Question

XYZ Corporation has a company with two divisions. Division A manufactures a product that has a variable cost of $6, sales price to the market of $12 and has a capacity to produce 30,000 units and its fixed costs are $60,000. Current production is 20,000 units.

a) 6% - Division B wants to purchase from Division A 5000 units at $7 per unit. Currently it pays $10 per unit to purchase these units from the market. What would you advise the company and Division A to do and why. Support your answer with calculations.

b) 6% - If an outside company wanted to purchase the 5000 units for $7, what would you advise the company and Division A to do?

Answer #1

a)

**DIVISION A ORIGINAL **

Profit= $12 - $6 (20,000) - $60,000 = $60,000

**DIVISION A NEW **

Profit= $12 - $6 (20,000) + $7 - $6(5,000) - $60,000 = $65,000

DIVISION A PROFIT = $5,000

**DIVISION B SAVINGS **

$10 - $7(5,000) = $15,000

TOTAL COMPANY GAIN = $5,000+ $15,000 =$ 20,000

So the company should Proceed to make the sale between the two divisions as net gain is $ 20,000

b) $7 - $6(5,000) = $5,000

The company still has to go with the division A making sale as there is additional gain of $5,000

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