The Electronics Division of Far North Telecom, Ltd., of Canadamanufactures an electrical switching unit that can be sold eitherto outside customers or to the Fiber Optics Division of Far NorthTelecom. Selected operating data on the two divisions are givenbelow:
Electronics Division
Unit selling price to outside customers 80
Variable production cost per unit 52
Variable selling and administrative
Expense per unit 9
Fixed production cost in total 300,000*
Fiber Optics Division:
Outside purchase price per unit (before any quantity discount)80
*Capacity 25, 000 units per year.
The Fiber Optics Division now purchases the switch from anoutside supplier at the regular $80 intermediate price less a 5%quantity discount. Since the switch manufactured by the ElectronicsDivision is of the same quality and type used by the Fiber OpticsDivision, consideration is being given to buying internally ratherthan from the outside supplier. As the company's president stated,"It's just plain smart to buy and sell within the corporatefamily."
A study has determined that the variable selling andadministrative expenses of the Electronics Division would be cut byone-third for any sales to the Fiber Optics Division. Topmanagement wants to treat each division as an autonomous unit withindependent profit responsibility.
1.Assume that the Electronics Division is currently selling only20,000 units per year to outside customers and that the FiberOptics Division needs 5,000 units per year.
c.Assume that the Fiber Optics Division finds an outsidesupplier that will sell the electrical unit for only $65 per unit.Should the Electronics Division be required to meet this price?Explain.
The Electronics Division of Far North Telecom, Ltd., of Canadamanufactures an electrical switching unit that can be sold eitherto outside customers or to the Fiber Optics Division of Far NorthTelecom. Selected operating data on the two divisions are givenbelow:
Electronics Division
Unit selling price to outside customers 80
Variable production cost per unit 52
Variable selling and administrative
Expense per unit 9
Fixed production cost in total 300,000*
Fiber Optics Division:
Outside purchase price per unit (before any quantity discount)80
*Capacity 25, 000 units per year.
The Fiber Optics Division now purchases the switch from anoutside supplier at the regular $80 intermediate price less a 5%quantity discount. Since the switch manufactured by the ElectronicsDivision is of the same quality and type used by the Fiber OpticsDivision, consideration is being given to buying internally ratherthan from the outside supplier. As the company's president stated,"It's just plain smart to buy and sell within the corporatefamily."
A study has determined that the variable selling andadministrative expenses of the Electronics Division would be cut byone-third for any sales to the Fiber Optics Division. Topmanagement wants to treat each division as an autonomous unit withindependent profit responsibility.
1.Assume that the Electronics Division is currently selling only20,000 units per year to outside customers and that the FiberOptics Division needs 5,000 units per year.
c.Assume that the Fiber Optics Division finds an outsidesupplier that will sell the electrical unit for only $65 per unit.Should the Electronics Division be required to meet this price?Explain.
