Reno Company Is a Decentralized Company That Has Two Divisions,Division

question 107

Essay

Reno Company is a decentralized company that has two divisions,Division A and Division B.Division A has the capacity to manufacture 24,000 units of a product that could be used by Division B.Division A currently is selling 16,000 units of the product to customers outside the company,incurring the following costs: variable costs of $7 per unit and total fixed costs of $48,000.The selling price to these customers is $16 per unit.
Division B needs 4,000 units of the product that Division A makes.It currently is purchasing the units from an outside supplier at a price of $15 each.Division B offers to purchase the units from Division A at a price of $12; the managers of Division A say the price must be at least $14.The managers of the two divisions appear to have reached a stalemate,which threatens to prevent the transfer from occurring within the company.
Required:
1)Is it in the best interest of Reno Company for Division B to purchase the units from Division A? Show quantitative support for your answer.
2)If the transfer is in the best interest of the company as a whole,should the top managers of Reno Company order the division managers to come to terms? How might the top management of Reno handle the situation other than by ordering the division managers to make the transfer?

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Definitions:

Tax Gains

The profits that are subject to taxes, realized from the sale of assets or investments.

Acquisition

The process by which one company purchases most or all of another company's shares or assets to gain control or ownership.

Merger

The combination of two or more companies into a single legal entity, often aiming to improve competitive positioning or expand market share.

Acquiring Firm

The company that purchases another company in a takeover or merger.