High Ace Division of Ford 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 High Ace division also sells to outside retail outlets, at P38 ner unit. Normally, outside sales amount to 25% of a total sales volume of 1,000,000 pumps per year. Typical combined annual data for both divisions follows: 10.16 Sales Variable costs, at P24 per pump Fixed costs P32,000,000 P24,000,000 3,000,000 P27,000,000 P 5.000,000 Total costs Gross margin Sarao Jeepney Motors has offered the Jeepney Division comparable pumps at a price of P28 per unit. The High Ace Division claims that it cannot possibly match this price because it could not earn any margin at P28. Required: 1. Assume that you are the manager of the Jeepney Division, comment on the claim of the High Ace division's manager. Assume that normal outside volume cannot be increased. 2. Assume that High Ace 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?
High Ace Division of Ford 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 High Ace division also sells to outside retail outlets, at P38 ner unit. Normally, outside sales amount to 25% of a total sales volume of 1,000,000 pumps per year. Typical combined annual data for both divisions follows: 10.16 Sales Variable costs, at P24 per pump Fixed costs P32,000,000 P24,000,000 3,000,000 P27,000,000 P 5.000,000 Total costs Gross margin Sarao Jeepney Motors has offered the Jeepney Division comparable pumps at a price of P28 per unit. The High Ace Division claims that it cannot possibly match this price because it could not earn any margin at P28. Required: 1. Assume that you are the manager of the Jeepney Division, comment on the claim of the High Ace division's manager. Assume that normal outside volume cannot be increased. 2. Assume that High Ace 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Answer the required question No. 1 and 2
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Transcribed Image Text:10.16
High Ace Division of Ford 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 High Ace division also sells to outside retail outlets, at P38 per
unit. Normally, outside sales amount to 25% of a total sales volume of 1,000,000 pumps per
year. Typical combined annual data for both divisions follows:
Sales
Variable costs, at P24 per pump
Fixed costs
P32,000,000
P24,000,000
3,000,000
P27,000,000
P 5,000,000
Total costs
Gross margin
Sarao Jeepney Motors has offered the Jeepney Division comparable pumps at a price of
P28 per unit. The High Ace Division claims that it cannot possibly match this price because it
could not earn any margin at P28.
Required:
1. Assume that you are the manager of the Jeepney Division, comment on the claim of
the High Ace division's manager. Assume that normal outside volume cannot be
increased.
2. Assume that High Ace 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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