Truball Inc., which manufactures sports equipment, consists of several operating

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 Division A's annual purchases Division B's variable costs per unit Division B's fixed costs, per year Division B's capacity utilization $180 13,000 units $170 $1,310,000 100% 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.)

Explanation / Answer

1.

From the above calculation it is evident that division A should buy inside from division B.

2-a.

2-b

From the above calculation it is evident that due to the savings in division B, division A should buy from outside. Thus the answer is YES.

3-a

3-b

From the above calculation it is evident that due to drop down in unit cost from outsiders, division A should buy from outside rather than from division B. Thus the answer is YES.

Calculation In Million ($) Purchase Costs from outside ($180*13,000) 2,340,000 Less: Savings of B's Variable Cost ($170*13,000) 2,210,000 Net Cost (Benefit) to buy Outside 130,000

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