Evans Bicycle Company Is Highly Decentralised

question 44

Multiple Choice

Evans Bicycle Company is highly decentralised.Each division is empowered to make its own sales decisions.The Assembly Division can purchase wheel rims,a key component,from the Production Division or from external suppliers.The Production Division has been the major supplier of rims in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the rims at $30 per rim for the next year.The Production Division recently increased its unit price to $50.The manager of the Production Division presented the following information - variable cost $42 and fixed cost $8 - to top management in order to attempt to force the Assembly Division to purchase the rims internally.The Assembly Division purchases 20 000 rims per month.
What would be the monthly operating advantage (or disadvantage) of purchasing the goods internally,assuming the external supplier increased its price to $80 per rim and the Production Division is able to utilise the facilities for other operations,resulting in a monthly cash-operating savings of $35 per rim?

• A)$760 000
• B)$(1 540 000)
• C)$60 000
• D)$1 600 000

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Definitions:

Ceteris Paribus

A Latin term used in economics to mean "all other things being equal," isolating one economic variable to analyze its effect.

Normative Economics

A branch of economics that expresses value judgments about economic fairness or what the economy ought to be like, focusing on policy prescriptions and outcomes.

Unintended Consequences

Outcomes that are not the ones foreseen or intended by a purposeful action, often contrasting with the action’s intended effects.

Endangered Species

Species of animals or plants that are at risk of extinction throughout all or a significant portion of their habitat.