Internal or External Acquisitions: No Opportunity Costs The Van Division of Moto

Question

Internal or External Acquisitions:

No Opportunity Costs The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for $43 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

$48

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 $56 per wheel.

(a) Should the Wheel Division manager accept the offer?
      Calculate the net benefit (or cost) to the Wheel Division of accepting the offer from the Van Division.
      $Answer per wheel

(b) From the standpoint of the company, will the internal sale be beneficial?
      Calculate the net benefit (or cost) to Motocar Corp. if the Wheel Division accepts the offer from the Van Division.
    $Answer per wheel

$48

Explanation / Answer

a Net benefit to the Wheel Division = 180000*(43-14-10-7)= $2160000 b Net benefit to Motocar Corp = 180000*(56-14-10-7)= $4500000

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