Edwards Inc.manufactures electronics.It consists of several divisions operating investment centers.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 would be $10 less because it saves on marketing expenses.Division A requires 10,000 units.
Required: How would Division B selling to Division A affect Division A's purchasing costs? How would intercompany sales affect Division B? What solution would be best for Edwards Inc. ,assuming Division B has the ability to operate at full capacity?

Question

Quizplus · Accepted Answer

Feedback: Division A: It costs $1,100,000 (10,000 x $110)to purchase currently.It would cost $850,000 (10,000 x $85)to purchase from Division B.Therefore,Division A would save $250,000 if Division B sold 10,000 units to Division A.The best solution would be for Division B to sell 2,500 units to Division A @$70/unit,and A can outsource the additional 7,500 units.