Question

The Electronics Division of Far North Telecom, Ltd., of Canada manufactures an electrical switching unit that can be sold either to outside customers or to the Fiber Optics Division of Far North Telecom. Selected operating data on the two divisions are given below:

Electronics Division

Unit selling price to outside customers            80

Variable production cost per unit

Variable selling and administrative    52

Expense per unit

Fixed production cost in total Fiber Optics Division: 9

Outside purchase price per unit (before any quantity discount)        80

*Capacity 25, 000 units per year.

The Fiber Optics Division now purchases the switch from an outside supplier at the regular $80 intermediate price less a 5% quantity discount. Since the switch manufactured by the Electronics Division is of the same quality and type used by the Fiber Optics Division, consideration is being given to buying internally rather than from the outside supplier. As the company's president stated, "It's just plain smart to buy and sell within the corporate family."

A study has determined that the variable selling and administrative expenses of the Electronics Division would be cut by one-third for any sales to the Fiber Optics Division. Top management wants to treat each division as an autonomous unit with independent profit responsibility.

1.Assume that the Electronics Division is currently selling only 20,000 units per year to outside customers and that the Fiber Optics Division needs 5,000 units per year. c. Assume that the Fiber Optics Division finds an outside supplier that will sell the electrical unit for only $65 per unit. Should the Electronics Division be required to meet this price? Explain.

Answer 1

Unit selling price for Electronic Division to outside customers = $80

Capacity = 25000 units

Currently selling = 20000 units

Spare capacity = 5000 units

Fibre Optics Division needs also = 5000 units

Hence if Electronic Division transfer units to Fibre Optics Division then there is no contribution lost & No Opportunity Cost

Hence minimum price ( Relevant cost )for this transfer :-

Variable production cost	52
Variable selling & Admn cost	6*
Relevant Cost	58

*Variable selling & Admn cost is cut by 1/3 if sold to Fibre optic Division

Fiber Optics Division finds an outside supplier that will sell the electrical unit for only $65 per unit

But Relevant cost for Electronic Division = $58

Hence Electronic Division should be required to meet this price