Suppose Euroson's Console Division is developing a new game console called PS5. It asks Euroson's Sound Division to provide speakers for PS5. The Sound Division currently sells identical speaker systems to outside customers at 10.00 each. The Console Division offers to pay the Sound Division 6.00 for each sound system because of its own existing costs and its need to show a profit contribution toward Euroson. The Console Division also believes that the market for PS5 will grow which will benefit the Sound Division because its future orders will increase.

[3 marks]

[Total 12 marks]

The cost to produce PS5 for the Console Division comprises purchased parts from outside vendors (26.10), internal variable costs (19.50), fixed overhead (10.00) in addition to the sound system costs. The predicted selling price for PS5 is 64.00.

The Sound Division is operating at full capacity. Euroson's Console Division is operating at 50% of capacity and PS5 is regarded as an important new product by this division that will increase its use of capacity.

Euroson evaluates divisional managers on the basis of pretax return on investment (ROI) and profits achieved (in ) relative to budgets.

REQUIRED:

a) Will the Sound Division supply the sound system to the Console Division at the proposed price? Show your calculations.

[4 marks]

b) Would it benefit Euroson if the Sound Division agreed to supply the sound system to the Console Division? Show your calculations.

[4 marks]

c) Should the Sound Division be forced to supply the sound system to the Console Division at the proposed price if Euroson thought this would increase the profit of the company as a whole? Explain your answer with supporting calculations.

[4 marks]