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Question 5 (Total 10 points) The Jill-Farley Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing
Question 5 (Total 10 points) The Jill-Farley Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate prot 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 Jill-Farley. Division C has in the past always purchased a tractor-engine component from Division A. However, when informed that Division A is increasing its selling price to $145, Division C's manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $120 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 the price. Division A's manager supplies the following operating data: Division C's annual purchases of the engine component ............... 1,800 units Division A's variable cost per unit of the engine component........... $110 Division A's fixed cost per unit of the engine component (based on the total units purchased by Division C) .................................. $ 20 Required: (3) Assume that there are no alternative uses for internal facilities (i.e., the specialized equipment) of Division A. Division A has enough capacity to meet the demand. What should be the lowest acceptable transfer price for Division A and the highest acceptable transfer price for Division C? (3 points) (b) Assume that internal facilities (i.e., the specialized equipment) of Division A have no idle capacity even if Division C does not purchase from Division A. Specifically, by not producing the 1,800 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 $21,000. Whether the Jill-Farley company as a whole will benefit if Division C purchases the 1,800 units of components from external suppliers for $120 per unit? Show your computations. (3 points) (c) Assume that Division A can sell the 1,800 units to other customers at $153 per unit with an additional variable marketing costs of $8 per unit (i.e., Division A has no idle capacity). Determine whether the Jill-Farley company as a whole will benet if Division C purchases the 1,800 units from external suppliers at $120 per unit. Show your computations. (4 points) 12
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