Question

# XYZ Corporation has a company with two divisions. Division A manufactures a product that has a...

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?

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