Evans Bicycle Company is highly decentralised.Each division is empowered to make its own sales decisions.The Assembly Division can purchase wheel rims,a key component,from the Production Division or from external suppliers.The Production Division has been the major supplier of rims in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the rims at $30 per rim for the next year.The Production Division recently increased its unit price to $50.The manager of the Production Division presented the following information - variable cost $42 and fixed cost $8 - to top management in order to attempt to force the Assembly Division to purchase the rims internally.The Assembly Division purchases 20 000 rims per month.
What would be the monthly operating advantage (or disadvantage)of purchasing the goods internally,assuming the external supplier increased its price to $80 per rim and the Production Division is able to utilise the facilities for other operations,resulting in a monthly cash-operating savings of $35 per rim?
A)$760 000
B)$(1 540 000)
C)$60 000
D)$1 600 000

Question

Quizplus · Accepted Answer

The operating advantage of purchasing internally is calculated as the difference in cost between purchasing externally and internally, plus any savings from utilizing facilities for other operations. If the external price is $80 and the internal variable cost is $42, the cost difference is $38 per rim. With 20,000 rims, this is $760,000. Adding the $35 savings per rim for other operations, the total advantage is $760,000 - $700,000 = $60,000.

Evans Bicycle Company Is Highly Decentralised