Rotech co June 2014

Hi Dear tutor, I will be having some questions.

C co sell to gearbox division at 7550 and its external sales are 8010

Outside supplier offers 5% discount on the current internal sales.

C co currently satisfies 60% of its external demand and the remaining is sold to Gearbox division and its variable cost is 40% of revenue

Since C co is working at full capacity, then overall sales of C co before selling to both sides are 8010/0.6=13550

C co sells to 8010 to external customer and there is still remaining 5340

I approached the case by looking at a wider picture scenario.

Since C co is working at full capacity, C co sells to the remaining to Gearbox in the following way: marginal cost 2210+lost contribution 5340=7550—–do you consider my understanding here is logical?Usually if the one division is working at full capacity we calculate marginal cost plus lost contribution and here I created the above calculation.???

If Gearbox decided to buy from outside supplier, then C c will have spare capacity of 2210 and its variable cost will be 2210*0.4=884

Since Gearbox works at full capacity it will not satisfy to sell it 884+5340=6224
Outside supplier to Gearbox division 7550*0.95=7173