The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager appeals to top management of Kelly-Elias for support in the dispute with division C and supplies the following operating data: C’s annual purchases of the tractor-engine component 1,900 units A’s variable cost per unit of the tractor-engine component $ 105 A’s fixed cost per unit of the tractor-engine component $ 25 Q. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division C, division A’s equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $22,800. Should division C purchase from external suppliers? Show your computations.
The Kelly-Elias Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Kelly-Elias. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $135, division C’s manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $115 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high
C’s annual purchases of the tractor-engine component 1,900 units
A’s variable cost per unit of the tractor-engine component $ 105
A’s fixed cost per unit of the tractor-engine component $ 25
Q. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,900 units for division C, division A’s equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $22,800. Should division C purchase from external suppliers? Show your computations.
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