Edwards Inc. manufactures electronics. It consists of several divisions classified as investment centers for performance evaluation purposes. Division A desires to purchase materials from Division B at a price of $85 per unit. Division B can produce 25,000 units at full capacity, and is currently operating at 90% capacity with a variable cost of $80 per unit. Division B currently sells only to outside customers who pay $115 per unit. Division A pays an outside company $110 per unit. If purchased from Division B, B's variable costs per unit would be $10 less because the division would save on marketing expenses for these internal transfers. Division A requires 10,000 units.
Required:
1. How would Division B selling to Division A affect Division A's purchasing costs?
2. How would intercompany sales affect Division B?
3. What solution would be best for Edwards Inc., assuming Division B has the ability to operate at full capacity?

Question

Quizplus · Accepted Answer

The Answer of Edwards Inc. manufactures electronics. It consists of several divisions classified as investment centers for performance evaluation purposes. Division A desires to purchase materials from Division B at a price of $85 per unit. Division B can produce 25,000 units at full capacity, and is currently operating at 90% capacity with a variable cost of $80 per unit. Division B currently sells only to outside customers who pay $115 per unit. Division A pays an outside company $110 per unit. If purchased from Division B, B's variable costs per unit would be $10 less because the division would save on marketing expenses for these internal transfers. Division A requires 10,000 units.
Required:
1. How would Division B selling to Division A affect Division A's purchasing costs?
2. How would intercompany sales affect Division B?
3. What solution would be best for Edwards Inc., assuming Division B has the ability to operate at full capacity?