The Fair Play Division of Fast Company Produces Wheels for Off-Road

question 40

Essay

The Fair Play Division of Fast Company produces wheels for off-road sport vehicles. One-half of Fair Play's output is sold to the Glow Division of Fast; the remainder is sold to outside customers. Fair Play's estimated operating profit for the year is:
$\begin{array}{lrr}&\text { Internal}&\text { Outside}\\ \text { Sales } & \$ 300,000 & \$ 400,000 \\\text { Variable costs } & 200,000 & 200,000 \\\text { Fixed costs } & 60,000 & 60,000 \\\text { Operating profits }&\$40,000&\$140,000 \\\text { Unit sales }&20,000&20,000\end{array}$

Glow Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier on a continuing basis.
Required:
a. The Fair Play Division cannot sell any additional products to outside customers. Should the Fast Company allow Glow Division to purchase the wheels from the outside supplier at $13.00 per unit?
b. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Fast of requiring that the wheels be made internally and sold to Glow Division?
c. If the Fair Play Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Fair Play should accept from Glow Division?
d. The Fair Play Division cannot sell any additional products to outside customers. What is the minimum selling price that Fair Play should accept from the Glow Division?

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Definitions:

Net New Equity

The amount of equity capital a company raises through the issuance of new shares minus any repurchases of existing shares.

Equity Sales

The process of selling ownership interest in a company, typically in the form of stocks, to raise capital.

Equity Repurchases

The method through which a corporation repurchases its shares from the market, thus decreasing the total number of shares available.

Fixed Cost

Expenses that do not change in total regardless of the level of production or sales activity, such as rent, salaries, and insurance.