Problem A Frances Industries has two divisions (Parts and Tools).The Tools Divis

Question

Problem A

Frances Industries has two divisions (Parts and Tools).The Tools Division wants to purchase a part from the Parts Division to use in manufacturing a new product. Information about the requested part:

Parts Division Capacity (per year) $ 200,000

Sales price to outside parties $100.00

Variable cost/part $40.00

Fixed cost/year $10,000,000

1. The Parts Division is currently manufacturing 100,000 parts per year.

Tools Division asks for 20,000 parts. What is the minimum price (per unit) the Parts Division should charge?

2. Assume instead that the Parts Division is currently operating at full capacity (all units are sold to outside customers) and capacity can't be increased.

3. Assume instead that the Parts Division is currently selling 190,000 parts to outside customers?

What is the minimum price (per unit) the Parts Division should charge?

4.What is the minimum price (per unit) the Parts Division should charge?

Explanation / Answer

1. Part Division is currently manufacturing 100,000 parts per year.

Minimum price would be the variable cost per unit as there will be no extra expenses to produce aditional parts.

Minimum price would be $40.00 per unit

2. Assume instead that the Parts Division is currently operating at full capacity (all units are sold to outside customers) and capacity can't be increased.

Minimum price would be the selling price per unit as there is no increased capacity in the part division.

Minimum price would be $100.00 per unit

3. Assume instead that the Parts Division is currently selling 190,000 parts to outside customers?

For the 10,000 units minimum price would be $100.00 per unit

For rest 10,000 units minimum price would be $40.00 per unit

Average minimum price would be = $70.00 per unit

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