Question

[The following information applies to the questions displayed below.] Truball Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since division B plans to increase its selling price for the same materials to $200. Information for division A and division B follows: Outside price for materials $150 Division A’s annual purchases 10,000 units Division B’s variable costs per unit $140 Division B’s fixed costs, per year $ 1,250,000 Division B’s capacity utilization 100 % Required: 1. Assume that division B cannot sell its materials to outside buyers. Calculate the net cost or benefit to the company as a whole if Division A purchases the materials outside the company. 2-a. Assume that division B can save $200,000 in fixed costs if it does not manufacture the material for Division A. Calculate the net cost or benefit to the company as a whole for A to purchase outside the company. 2-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market? 3-a. Assume the situation in Requirement 1. If the outside market value for the materials drops $20, calculate the net cost or benefit to the company as a whole for A to purchase outside the company. 3-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market?

Answer 1

Solution 1:
Computation of Net cost or benefit to the company
Savings of Division B's Variable Cost ($140*10000)	1400000
Less: Purchase Costs from outside ($150*10000)	1500000
Net Cost to buy Outside	-100000

Solution 2a:
Computation of Net cost or benefit to the company
Savings of Division B's Variable Cost ($140*10000)	1400000
Savings of Division B's Fixed Cost	200000
Less: Purchase Costs from outside ($150*10000)	1500000
Net Benefit to buy Outside	100000

2b:

Yes.

Solution 3a:
Computation of Net cost or benefit to the company
Savings of Division B's Variable Cost ($140*10000)	1400000
Less: Purchase Costs from outside [($150 - $20)*10000]	1300000
Net Benefit to buy Outside	100000

3b:

Yes.