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 $165 Division A’s annual purchases 11,500 units Division B’s variable costs per unit $155 Division B’s fixed costs, per year $ 1,280,000 Division B’s capacity utilization 100 %"
Required:
1. Assume that division B cannot sell it 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.)
2- a. Assume that division B can save $220,000 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.)

Answer 1

Answer:

Explanation:

1. Division A purchase decision

Purchase cost from outside 11,500 × 165 = $1,897,500‬

less: savings of B variable cost 11,500 × 155 = $1,782,500‬

     Net cost or benefit to buy outside = $115,000

Therefore the net cost to purchase the materials outside the company is $115,000

2. Purchase cost from outside 11,500 × 165 = $1,897,500‬

less: savings of B variable cost 11,500 × 155 = $1,782,500‬

less: savings of B material assignment = $220000

Net cost or benefit to buy outside = ($105,000)

The negative value in the benefit is due to the increased savings of division B. It indicates the Division A to buy the material from outside which is beneficial for the division.