Problem 2 MVS, Inc. produces cleaning equipment, and operates several divisions.

Question

Problem 2 MVS, Inc. produces cleaning equipment, and operates several divisions. that it sells to other companies for $25 per unit. It i several divisions. Division A produces a product for s25 per oper Variable s currently operating at full capacity of 60.000 units per year capacity of cost is $1 3 per unit, and variable marketing cost is $3 per unit. per unit, and The company wishes to create a new of Division A's product (or one very B; to produce an innovative new tool that requires the use division, Division similar). Division B wil produce 20,000 units. Division B can purchase a product X for $18 per unit. However, MvS, Inc. is considering having Division A supply Division B with the product If Division A supplies with the units. Division B, the transfer price would be $16 and there would be no marketing costs associated 1. From Division A's perspective the net benefit (cost) is? a. b. c. Net benefit of $360,000. Not cost of $180,000. Net cost of $120,000 d. Net cost of $60,000 2. From Division B' s perspective the net benefit (cost) is? a. b. c. Net benefit of $100,000. Net benefit of $40,000. Net cost of $360,000. d. Net cost of $60,000. 3. From MVS, Inc.'s perspective the net benefit (cost) is? a. b. c. Net cost of $40,000 Net benefit of $180,000 Net benefit of $40,000. d. Net cost of $80,000

Explanation / Answer

1. Net benefit (cost) = New profit - Earlier profit

= (16-13)*20000 + (25-13-3)*20000

= -120000

So, cost of 120,000. Hence option C.

2. From B's perspective,

Net benefit = (earlier cost price - current cost price)*units

= (18-16)*20000

= 40000

Hence option B.

3. Net benefit (cost) = -120000+40000

= -80000

Cost of 80000

Hence option D.

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