Question

Please explain reasoning

Holmes and Watson are divisions of Doyle, Inc., operating as profit centers. Both are profitable. One of the products produced by Holmes is A62, which normally sells for $260/unit. Cost is $175/unit (60% variable). Watson is planning a new product, and is taking bids on one of the subassemblies. A62 would be appropriate for this subassembly. a) Discuss the factors Holmes should consider when submitting a bid. If Holmes does not submit the low bid, might Watson still benefit from accepting their bid? Discuss briefly.

Answer 1

Answer

a) following factors are to be considered when Holmes submit a bid rate to watson:

i) Requirement of watson that is how much quantity watson require for his new product.

ii) Machine capacity in Holmes divison.

iii) Whether any increase in fixed cost in Holmes division.

iv) Is there any machine capacity constraints.

v) Resources available in the market.

vi) Raw Material available in the market for production of A62.

vii) Is there any increase in variable cost of product due to increase in production capacity.

b) If Holmes does not submit the low bid rate then also Watson should accept the bid rate as both the division are of same company so overall profit from the company's point of view will still increase as compare to purchase from market.

If we think from division wise profit then watson should consider the market rate also so that watson can compare the A62 product's price from market and from Holmes division. and he will purchase the product which offers less price.