Civic Division of Hondo Motors Corporation produces jet pumps for jeepneys. It has been the sole supplier of pumps to the Jeepney Division and charges P30 per unit, the current market price in big lots. The Civic division also sells to outside retails outlets, at P38 per unit. Normally, outside sales amount to 25% of a total sales of 1,000,000 pumps per year. Typical combined annual data for both divisions follows: Sales P32,000,000 Variable Costs, at P24 per pump 24,000,000 Fixed Costs 3,000,000 Total Costs 27,000,000 Gross Margin 5,000,000 Mitsushi Jeepney Motors has offered the Jeepney Division comparable pumps at a price of P28 per unit. The
Civic Division of Hondo Motors Corporation produces jet pumps for jeepneys. It has been the sole supplier of pumps to the Jeepney Division and charges P30 per unit, the current market price in big lots. The Civic division also sells to outside retails outlets, at P38 per unit. Normally, outside sales amount to 25% of a total sales of 1,000,000 pumps per year. Typical combined annual data for both divisions follows:
Sales P32,000,000
Variable Costs, at P24 per pump 24,000,000
Fixed Costs 3,000,000
Total Costs 27,000,000
Gross Margin 5,000,000
Mitsushi Jeepney Motors has offered the Jeepney Division comparable pumps at a price of P28 per unit. The Civic Division claims that it cannot possibly match this price because it could not earn any margin at P28.
REQUIRED:
- Assume that you are the manager of the Jeepney Division, comment on the claim of the Civic division’s manager. Assume that normal outside volume cannot be increased.
- Assume that Civic division feels that it can increase outside sales by 750,000 pumps per year by increasing fixed costs by P2,000,000 and variable costs by P3 per unit while reducing the selling price to P36. Assume that maximum capacity is 1,000,000 pumps per year. Should the division reject intracompany business and concentrate on outside sales?
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