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Truball Inc
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 $110 Division A's annual purchases 6,000 units Division B's variable costs per unit $100 Division B's fixed costs, per year $1,170,000 Division B's capacity utilization 100%
Required: 1. Assume that division B cannot sell its 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. 2-a. Assume that division B can save $150,000 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. 2-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market? 3-a. Assume the situation in Requirement 1. If the outside market value for the materials drops $16, calculate the net cost or benefit to the company as a whole for A to purchase outside the company. 3-b. From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market?
Complete this question by entering your answers in the tabs below.
Req 1
Req 2A
Req 28
Req 3A
Req 38
Assume that division B cannot sell its 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.)
Req 2A >
Expert Solution
1)
| Computation of Net Cost or Benefit to the Company: | |
| Purchase Costs from Outside ($110*6,000) | 660,000 |
| Less: Savings of B's Variable Costs ($100*6,000) | 600,000 |
| Net Cost (Benefit) to buy Outside | 60,000 |
So, division A should buy inside from division B.
2-a)
| Computation of Net Cost or Benefit to the Company: | |
| Purchase Costs from Outside ($110*6,000) | 660,000 |
| Less: Savings of B's Variable Costs ($100*6,000) | 600,000 |
| Less: Savings of B Material Assignment | 150,000 |
| Net Cost (Benefit) to Buy Outside | -90,000 |
2-b) Due to the savings in division B, division A should buy from outside. Thus the answer is YES.
3-a)
| Computation of Net Cost or Benefit to the Company: | |
| Purchase Costs From Outside [($110-$16)*6,000] | 564,000 |
| Less: Savings of B's Variable Cost ($100*6,000) | 600,000 |
| Net Cost (Benefit) to Buy Outside | -36,000 |
3-b) 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.
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