The Van division of MotorCar Corporation has offered to purchase 180,000 wheels from the Wheel division for $42 per wheel. At a normal volume of 5000,000 wheels per year, production costs per wheel for the Wheel Division are as follows:
- Direct materals...........$15
- Direct labor................10
- Variable overhead.........6
- Fixedoverhead..............18
- Total............................$49
The wheel division has been selling 500,000 wheels per year to outside buyers at $58 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $55 per wheel.
A. Should the Wheel Division manager accept the offer? Show computations/work.
b. From the standpoint of the company, will the internal sale be beneficial?