MultiCorp Is a Decentralized Company That Rewards Divisional Managers Based

question 47

Essay

MultiCorp is a decentralized company that rewards divisional managers based on ROI. The Blue Division produces a component that is used by Jam Division. Blue's unit cost of manufacturing 5,000 components (capacity) is:
Blue can sell 4,000 units on the open market for £30 by incurring selling costs of £2 per unit.
An outside supplier has offered Jam 5,000 units of this same component for £29. Orders of less than 5,000 units would cost the Jam Division £31 each. Jam needs the 5,000 components to make finished goods, which provide a total contribution of £245,000 excluding the cost of the component.
The Jam Division's manager has approached the Blue Division manager with an offer to purchase the entire 5,000 units from the Blue Division for a total cost of £130,000 (£26 per unit). If this internal transaction is completed, the Blue Division would not incur the £2 unit selling costs.
Required: Analyze the effect of this offer considering the following:

a.
Is the Blue Division better off by accepting the offer to sell 5,000 units internally for £26 each?
b.
How much is the company as a whole better or worse off if the transaction is completed internally as opposed to each division dealing externally? Justify your answer.
c.
What is the highest price the Jam Division would consider paying the Blue Division for the component?

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Definitions:

FICA-Medicare

The portion of the Federal Insurance Contributions Act (FICA) tax that is dedicated to Medicare, funding hospital insurance for individuals under the Medicare program.

FUTA Payable

The amount owed by an employer for the Federal Unemployment Tax Act to fund state workforce agencies and unemployment compensation for workers who have lost their jobs.

Journal Entry

A record in the accounting journal that represents a financial transaction and includes details such as date, amounts, accounts impacted.

Debit

A debit is an accounting entry that increases an asset or expense account or decreases a liability or equity account.