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Truball Inc

Finance

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 $160 Division A's annual purchases 11,000 units Division B's variable costs per unit $150 Division B's fixed costs, per year $1,270,000 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 $155,000 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 $21, 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? 
 

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.) 
F  

Net benefit to the company as a whole from buying outside Net cost to the company as a whole from buying outside 

Assume that division B can save $155,000 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.) 
F  

Net benefit to the company as a whole for A to buy outside Net cost to the company as a whole for A to buy outside 

From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market? 
()Yes 
()No 

Assume the situation in Requirement 1. If the outside market value for the materials drops $21, 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.) 

Net benefit to the company as a whole for A to buy outside Net cost to the company as a whole for A to buy outside 
From the standpoint of the effect of the transaction on the company as a whole, should Division A purchase from the outside market? 
Yes 
ON° 
 

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1) Computation of Net Cost or Benefit to the Company  
as a whole if Division A purchases the material outside the company:
 
Purchase Costs from outside ($160*11,000) 17,60,000
Less: Savings of B's Variable Cost ($150*11,000) 16,50,000
Net Cost (Benefit) to buy Outside 1,10,000

 

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

 

2-a) Computation of Net Cost or Benefit to the Company  
as a whole if Division A to purchase outside the company:
 
Purchase Costs from outside ($160*11,000) 17,60,000
Less: Savings of B's Variable Cost ($150*11,000) 16,50,000
Less: Savings of B Material Assignment 1,55,000
Net Cost (Benefit) to Buy Outside -45,000

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) Computation of Net Cost or Benefit to the Company  
as a whole if Division A purchases the material outside the company:
Calculation In Million ($)
Purchase Costs from outside (($160-$21)*11,000) 15,29,000
Less: Savings of B's Variable Cost ($150*11,000) 16,50,000
Net Cost (Benefit) to buy Outside -1,21,000

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.

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