Question - The Assembly Division of Hunter Valley Bicycles Company has offered to purchase 90 000 frames from the Frame Division for $170 per unit. At a normal volume of 250 000 frames per year, production costs per frame are as follows:
|
Direct materials
|
$80
|
|
Direct manufacturing labour
|
40
|
|
Variable factory overhead
|
24
|
|
Fixed factory overhead
|
40
|
|
Total
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$184
|
The Frame Division has been selling 250 000 frames per year to outside buyers at $230 each; capacity is 350 000 frames per year. The Assembly Division has been buying frames from outside sources for $225 each.
Required:
a) Explain whether the Frame Division Manager should accept the offer.
b) Explain whether, from the company's perspective, the internal sales will be of any benefit.