Question

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 Division A's annual purchases Division B's variable costs per unit Division B's fixed costs, per year Division B's capacity utilization $170 12,000 units $160 $1,290,000 100% 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 $210,000 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 $22, 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? Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Req 2B Req 3A Req 3B Assume that division B can save $210,000 in fixed costs if it does not manufacture the material for Division A. Calculate the petcost or benefit to the company as a whole for A to purchase outside the company. (Enter all the amounts as positive value.) Net cost to the company as a whole for A to buy outside

Answer 1

1.If division B cannot sell, Net Cost to the company is the price paid over variable cost

= (170-160)*12,000

= $120,000 cost

2-a. Benefit = Fixed costs saved - Extra price paid

= 210,000 - 120,000

= $90,000 benefit

2-b.Yes

3-a. Benefit = (160-148)*12000 = $144,000 benefit

3-BYes