Perth Pillow Company Is Highly Decentralised

question 45

Multiple Choice

Perth Pillow Company is highly decentralised.Each division is empowered to make its own sales decisions.The Assembly Division can purchase swan down,a key component,from the Production Division or from external suppliers.The Production Division has been the major supplier of swan down in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the swan down at $20 per kilo for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information - variable cost $32 and fixed cost $8 - to top management in order to attempt to force the Assembly Division to purchase the swan down internally.The Assembly Division purchases 20 000 kilos of swan down per month.
What would be the monthly operating advantage (or disadvantage) of purchasing the goods internally,assuming the external supplier increased its price to $50 per kilo and the Production Division is able to utilise the facilities for other operations,resulting in a monthly cash-operating savings of $30 per kilo?

• A)$1 000 000
• B)$(400 000)
• C)$(240 000)
• D)$360 000

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Definitions:

Marginal Cost

The additional cost incurred by producing one more unit of a good or service.

Nash Equilibrium

Nash Equilibrium is a concept in game theory where each player's strategy is optimal given the strategies of all other players, leading to a situation where no player can benefit by changing strategies unilaterally.

Profit-Maximizing

A strategy or process by which a firm adjusts its production and pricing to achieve the highest profit possible.

Collude

To come to a secret understanding for a harmful purpose; often refers to competitors agreeing on prices or market shares to gain an advantage.