The Assembly Division of Hunter Valley Bicycles Company Has Offered

question 102

Essay

The Assembly Division of Hunter Valley Bicycles Company has offered to purchase 90 000 frames from the Frame Division for $170 per unit.At a normal volume of 250 000 frames per year,production costs per frame are as follows:
$$\begin{array} { | l | r| } \hline \text { Direct materials } & \$ 80 \\\hline \text { Direct manufacturing labour } & 40 \\\hline \text { Variable factory overhead } & 24 \\\hline \text { Fixed factory overhead } & \underline { 40 } \\\hline \text { Total } & \$ 184 \\\hline\end{array}$$
The Frame Division has been selling 250 000 frames per year to outside buyers at $230 each;capacity is
350 000 frames per year.The Assembly Division has been buying frames from outside sources for $225 each.
Required:
a.Should the Frame Division manager accept the offer? Explain.
b.From the company's perspective,will the internal sales be of any benefit? Explain.
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Definitions:

Risk-Return Trader

An investor who analyzes the potential return of an investment relative to its risk, aiming to maximize returns while minimizing risks.

Hedge Fund Consultant

A professional advisor who provides expertise and guidance on hedge fund strategies, investments, and operations.

Venture Capital

Money invested in a business by another business firm or group of individuals in exchange for an ownership share.

Commercial Paper

A short-term financial obligation without collateral, provided by companies typically to fund accounts receivable, stock, and to settle short-term debts.