Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Big Machines Corp. has two divisions. Division Y manufactures components that can be sold in the external market place or transferred to Division Z for
Big Machines Corp. has two divisions. Division Y manufactures components that can be sold in the external market place or transferred to Division Z for further processing. The following data relate to Division Ys component product.
Variable manufacturing costsunit $
Fixed costsunit at capacity $
Selling priceunit $
The capacity of the plant is units per year.
Division Z has offered to purchase units from Division Y at a price of $unit which is the market price of the component. The manager of Division Y has refused this offer stating that it would only return a rate of when the divisional target return on sales is The Division Y manager also states that additional fixed costs of $ would be required to produce the units.
The corporate required rate of return is of assets and the existing asset base in Division Y is $
Required:
a How many units must Division Y sell in order to achieve its required ROR? What profit margin would be earned at this level of sales?
marks
b Assume Division Y currently sells units to the external market and can accept Division Zs offer without affecting its external sales. Evaluate the refusal of Division Zs offer from the standpoint of the corporation as a whole and from Division Y manager's perspective.
marks
c Assume Division Y currently sells units to the external market and can accept Division Zs offer without affecting its external sales. Calculate Division Ys residual income with and without the sale to Division Z
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started