The Fabrication Division of American Car Company Has Offered to Purchase

question 115

Essay

The Fabrication Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit.At a normal volume of 250,000 batteries per year,production costs per battery are as follows:
$$\begin{array} { | l | r | } \hline \text { Direct materials } & \$ 40 \\\hline \text { Direct manufacturing labor } & 30 \\\hline \text { Variable factory overhead } & 12 \\\hline \text { Fixed factory overhead } & \underline { 40 } \\\hline \text { Total } & \$ 112 \\\hline\end{array}$$ The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 batteries per year.The Fabrication Division has been buying batteries from outside sources for $130 each.
Required:
a.Should the Electrical 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:

Easy Entry And Exit

A characteristic of competitive markets where firms can freely enter or leave the market with minimal barriers, ensuring competitive prices and efficiency.

Relatively Easy Entry

Characterizes markets where new competitors can join with minimal barriers, such as low startup costs or regulatory hurdles.

Similar Products

Products that serve the same or similar purposes and can be used interchangeably by consumers.

Large Number

A vague term often referring to a quantity much larger than what is typically encountered in everyday life.