Refer to Exercise 23-25. Assume that Division A can sell the 1,000 units to other customers at $155 per unit, with variable market ing cost of $5 per unit.
The Allison-Chambers Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit centre. Each division manager has been delegated full authority on all decisions involvingthe sale of that division’s output both to out siders and to other divisions of Allison-Chambers. 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 $150, Division C’s manager decides to purchase the engine component from external suppliers.
Division C can purchase the component for $135 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 Allison-Chambers for support in the dispute with Division C and supplies the following operating data:
C’s annual purchases of the tractor-engine component… 1,000 units
A’s variable cost per unit of the tractor-engine component.. $120
A’s fixed cost per unit of the tractor-engine component… $ 20
1. Determine whether Allison-Chambers will benefit if Division C purchases the 1,000 units from external suppliers at $135 per unit. Show your computations.