Division A offers its product to outside markets for $30. It incurs variable cos
ID: 2597555 • Letter: D
Question
Division A offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $31 per unit or from Division A for $30 plus $2 per unit in transportation costs in addition to the transfer price charged by Division A.
What is the net advantage or disadvantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31. Assume that Division A can market all that it can produce. (Omit the "$" sign in your response.)
If Division A had idle capacity sufficient to cover all of Division B's needs? What is the net advantage or disadvantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31. (Omit the "$" sign in your response.)
Division A offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $31 per unit or from Division A for $30 plus $2 per unit in transportation costs in addition to the transfer price charged by Division A.
Explanation / Answer
(a)
Net advantage or disadvantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31:(if division A operates at 100% capacity )
Company point of view it is a make or buy decision
Relevent cost to make (or) Relevent cost to buy whichever is lower
32 (or) 31
31
Hence,advantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31 is $1 per unit ( 32 - 31 ).
Relevent cost to make = Variable manufacturing cost + specifi fixed cost + opportuinty cost
= (11 + 2 ) + 0 + (30-11)
= 32
Relevent cost to buy = 31
(b)
Net advantage or disadvantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31:(if division A has idle capacity )
Company point of view it is a make or buy decision
Relevent cost to make (or) Relevent cost to buy whichever is lower
13 (or) 31
13
Hence,advantage per unit to the company if Division B decides to acquire the product from the outside supplier for $31 is $18 per unit ( 31 - 13 ).
Relevent cost to make = Variable manufacturing cost + specifi fixed cost + opportuinty cost
= (11 + 2 ) + 0 + 0
= 13
Relevent cost to buy = 31