Question

Franklin Company has two divisions, A and B. Division A manufactures 5,600 units of product per month. The cost per unit is calculated as follows. Variable costs Fixed costs Total cost $ 5.20 19.90 $26.10 Division B uses the product created by Division A. No outside market for Division A's product exists. The fixed costs incurred by Division A are allocated headquarters-level facility Sustaining costs. The manager of Division A suggests that the product be transferred to Division B at a price of at least $26.10 per unit. The manager of Division B argues that the same product can be purchased from another company for $19.20 per unit and requests permission to do so. Required 3-1. How much would the division gain or lose if Division B were to purchase the product from the outside company for $19.20 per unit? (Round your answer to 2 decimal places.) a-2. Is it in the best interest of Franklin Company for Division B to purchase the product from an outside company? 31. Division's gain or loss 2 Shoulid Franklin purchase the product from outside?

Answer 1

a.1 Relevant cost is here only the variable cost i.e $ 6.2 , so Division A is earning currently Sales ( 5600 * 26.1 ) - VC ( 5600 * 6.2 ) = $ 111440

So, it will loose $ 19.90 per unit i.e $ 111440.

a.2 NO, it is not in the best interest . it is best to supply the product at $ 19.2 as some of the Fixed cost will be recovered.