Problem: The Assembly division of Canadian 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:
Direct materials $40
Direct mfg. labour 20
Variable factory overhead 12
Fixed mfg. overhead 40
Total $112
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 Assembly division has been buying batteries from outside sources for $130 each.
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.