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 $100 5,000 units $90 $1,150,000 100% 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 $160,000 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 $15, 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

Answer 1

Variable Cost per unit of Producing Material	90
Cost of Buying from Outside Market	100
Additional Cost of Buying	-10
Total Loss to the company from Buying from Outside	-50000

Answer 2

Loss as calculated Above	-50000
Savings in Fixed Cost of Division B	160000
Net Gain of Buying from Outside	110000

Since there is net gain of $ 110,000 to the company as a whole. Division A should Purchase the material from the outside supplier

Answer 3

Variable Cost per unit of Producing Material	90
Cost of Buying from Outside Market	85
Saving from Purchasing	5
Total savings to the company from Buying from Outside	25000

Since there is net gain of $ 25,000 to the company as a whole. Division A should Purchase the material from the outside supplier