The Van division of MotorCar Corporation has offered to purchase 180,000 wheels
ID: 2351433 • Letter: T
Question
The Van division of MotorCar Corporation has offered to purchase 180,000 wheels from the Wheel division for $42 per wheel. At a normal volume of 5000,000 wheels per year, production costs per wheel for the Wheel Division are as follows:Direct materals...........$15
Direct labor................10
Variable overhead.........6
Fixedoverhead..............18
Total............................$49
The wheel division has been selling 500,000 wheels per year to outside buyers at $58 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $55 per wheel.
A. Should the Wheel Division manager accept the offer? Show computations/work.
b. From the standpoint of the company, will the internal sale be beneficial?
Explanation / Answer
Internal Txfer- Incremental Analysis : Offer price of part $42.00 Differential cost for internal txfer: Direct materals...........$15 Direct labor................10 Variable overhead.........6 $31 Profit from selling to Van Div $11 As Wheel Div has idle capacity, it should accept the order for 180,000 wheels from Van div. This will result in addl Income of $11*180,000 = $1,980,000 .....Ans (a) The fixed factory overhead is excluded because it is not relevant and will be incurred b. From Company view, Internal sales will be beneficial as below Make the Part Buy the Part Incremental Analysis : Purchase price of part $55 Differential cost from Internal Sale: $42 Net saving from Internal Sale $13 Thus from Internal Txfer, firm will save $13*180,000 = $2,340,000 Thus Firm has increased its CFs by $1980,000 + $2,340,000 = $4,320,000
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