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