Electric Art Company has a print division that is currently producing 100,000 pr

Question

Electric Art Company has a print division that is currently producing 100,000 prints per year but has a capacity of 150,000 prints. The variable costs of each print are $32, and the annual fixed costs are $1,350,000. The prints sell for $48 in the open market. The company's retail division wants to buy 50,000 prints at $27 each. The print division manager refuses the order because the price is below variable cost. The retail division manager argues that the order should be accepted because it will lower the fixed cost per print from $9 to $6.

a-Should the retail division order be accepted? Why or why not?

b-From the viewpoints of print division and the company, should the order be accepted if the manager of the retail division intends to sell each print in the outside market for $44 after incurring additional costs of $10 per print?

c- What action should the company take, assuming it believes in divisional autonomy?

Explanation / Answer

1) No it should not accept since ( $27 - $32) = -5 *50,000 = $125,000 losss

2) 44 - (48 +10) = -14*50,000 = 700,000 loss

c) It should encourage managers to negotiate a fair price between $32 and $42

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