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 $100 5,000 units $90 Division B's fixed costs, per year $1,150,000 Division B's capacity utilization 1008 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? Complete this question by entering your answers in the tabs below. Req 3A Req 3B Req 1 Req 2A Req 2B 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. (Enter all the amounts as positive value.) Req 1 > Req 2A Complete this question by entering your answers in the tabs below. Req 1 Req 2A Req 2B Req 3A Req 3B 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. (Enter all the amounts as positive value.) Req 1 Req 2B Req 3B Req 1 Req 2A Req 2B Req 3A From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market? OYes ONo Req 3A Req 2A Req 1 Req 2A Req 2B Req 3A Req 3B Assume the situation in Requirement 1. If the outside market value for the materials drops $15, calculate the net cost benefit to the company as a whole for A to purchase outside the company. (Enter all the amounts as or positive value.) > Req 2B Req 3B Req 2B Req 3A Req 3B Req 1 Req 2A From the standpoint of the effect of the transaction on the company as a market? whole, should Division A purchase from the outside Yes ONo Req 3A Req 3B

Answer 1

Answer 1

Net cost to the company as a whole = $ 50,000.

Answer 2-a

Net benefit to the company as a whole = $ 110,000

Answer 2-b

Yes

Answer 3-a

Net benefit to the company as a whole = $ 25,000.

Answer 3-b

Yes

Explanation:

Answer 1

Assuming Division B cannot sell its material to outside buyers, it will have spare capacity and it should sell to Division A.

Net cost to the company as a whole if Division A purchases from outside = $ (100-90)*5,000 i.e. $ 50,000.

Answer 2-a

Assuming Division B can sell $ 160,000 if it does not supply to Division A.

Net benefit = Savings in fixed cost (-) loss due to extra purchase cost

= $ 160,000 (-) $ 50,000 = $ 110,000

Answer 2-b

For the company as a whole, the Division A should purchase from the outside market.

If Division A purchases from Division B, there is an incremental loss of $ 110,000 as calculated in part 2-a.

Answer 3-a

If the outside market value drops by $ 15, the product has become cheaper for division A.

Because Division B cannot sell its material to outside buyers, it will have spare capacity. But its variable cost is $ 90.

The net benefit to the company as a whole if Division A purchases from outside = $ (90-85)*5,000 i.e. $ 25,000.

Answer 3-b

For the company as a whole, the Division A should purchase from the outside market because of the benefit of $ 25,000.

In case of any doubt, please comment.