Problem B Northern Co has recently opened a new division (Dishwasher Division).
ID: 2497045 • Letter: P
Question
Problem B Northern Co has recently opened a new division (Dishwasher Division). The new division needs a special pump as a component part of one of their dishwasher models. They can purchase these pumps from an outside supplier for $18 each. At their current volume, they need 100,000 pumps per year. Northern Co.'s Pump Division also makes and sells these pumps. They have a capacity of 600,000 pumps per year and are currently selling 550,000 pumps to outside customers for $20 each. Since they have some excess capacity, management of Northern Co is considering asking the new Dishwasher Division to purchase their pumps from the Pump Division. The Pump Division would be able to avoid all variable selling costs on any sales to the Dishwasher Division. Capacity could notbe increased. Both divisions are operated as profit centers. The Pump Division's cost per pump, based on their normal volume of 550,000 pumps per year: Variable costs: Direct materials $ 6.00 Direct labor 3.00 MOH 2.00 Selling 1.00 Fixed costs 3.00 Total Cost $ 15.00
4. By how much in total, will Northern Co. be better or worse off (overall) if the pumps needed by the Dishwasher Division are made by the Pump Division?
6. What's the minimum price (per unit) the Pump Division would want to charge the Dishwasher Division?
Please can you help with these 2 problems? thank you
Explanation / Answer
Q - . By how much in total, will Northern Co. be better or worse off (overall) if the pumps needed by the Dishwasher Division are made by the Pump Division?
Solution -
Loss on purchase of pump by dishwasher division from Northern Co. - (20-18) * 50000 = 100000
Profit by Northern Co. if it transfer pump to dishwasher division at 20-
Selling Price per pump = 20
Additional Cost per pump -
Direct material - $ 6
Direct Labour - & 3
MOH - $ 2
Selling OH - Nil ( as mentioned in the question )
Fixed cost - Nil ( Fixed cost is already charged from 550000 unit produced by Northern co. It will not
increased due to extra prodiuction of 50000 units )
Total Cost - $ 11 per unit
Toal profit on production & transfer of pump to division - (Selling price - Cost price )* No. of unit
($20-$11)*50000 = $450000
Net profit or Loss - $450000-$100000 = $ 350000
Answer- If pump needed by dishwasher division is made by northern Co. then it will make net profit to northern Co. of $ 350000 ( $ 450000 pfoit to Northern Co. & Loss of $ 100000 to Dishwasher Division )
Q- What's the minimum price (per unit) the Pump Division would want to charge the Dishwasher Division?
Solution -
Minimum price as charged by pump division should be the actual additional cost which pump division will incurr to produce additional units.
Additional cost to be incur -
Direct material - $ 6
Direct Labour - & 3
MOH - $ 2
Selling OH - Nil ( as mentioned in the question )
Fixed cost - Nil ( Fixed cost is already charged from 550000 unit produced by Northern co. It will not
increased due to extra prodiuction of 50000 units )
Total Cost - $ 11 per unit
Answer - Pump division should charge $11 per unit ( minimum ) form dishwasher division.
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