Question

# Internal or External Acquisitions: No Opportunity Costs The Van Division of MotoCar Corporation has offered to...

Internal or External Acquisitions:

No Opportunity Costs The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for \$43 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

 Direct materials \$14 Direct labor 10 Variable overhead 7 Fixed overhead 17 Total \$48

The Wheel Division has been selling 500,000 wheels per year to outside buyers at \$58 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at \$56 per wheel.

(a) Should the Wheel Division manager accept the offer?
Calculate the net benefit (or cost) to the Wheel Division of accepting the offer from the Van Division.

(b) From the standpoint of the company, will the internal sale be beneficial?
Calculate the net benefit (or cost) to Motocar Corp. if the Wheel Division accepts the offer from the Van Division.

Solution 1:

Relevant cost per unit to make extra 180000 wheels = Direct material + direct labor + Variable overhead = \$14 + \$10 + \$7 = \$31 per unit

As wheel division is having excess capacity, therefore if offer of VAN division is accepted then it will not decrease regular sale of wheel division. further price offered by VAN division is higher than relevant cost of wheel division, therefore wheel division manager should accept the offer.

Net benefit to the wheel division of accepting offer from VAN division = (\$43 - \$31) * 180000 = \$2,160,000

Solution 2:

Yes, from stand point of the company, internal sale be beneficial.

Net benefit to Motor Corp. = (\$56 - \$31) * 180000 = \$4,500,000