Internal or External Acquisitions:

No Opportunity Costs

The Morgan company has offered to purchase $180,000$ wheels from the Wheel Division for $$44$ per wheel. At a normal volume of $500,000$ wheels per year, production costs per wheel for the Wheel Division are as follows:

Direct materials $$15$

Direct labor $10$

Variable overhead $5$

Fixed overhead $18$

Total $$48$

The Wheel Division has been selling $500,000$ wheels per year to outside buyers at $$60$ each. Capacity is $700,000$ wheels per year. The Van Division has been buying wheels from outside suppliers at $$57$ per wheel.

$($a$)$ Should the Wheel Division manager accept the offer?

Calculate the net benefit $($or cost$)$ to the Wheel Division of accepting the offer from the Morgan Company.

$Answer

per wheel

$($b$)$ From the standpoint of the company, will the internal sale be beneficial?

Calculate the net benefit $($or cost$)$ to Motocar Corp. if the Wheel Division accepts the offer from the Morgan Company

$Answer

per wheel