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Hi Tutor,
Can you help to guide me to the below answer? as I’m confused about the examiner’s view on
thisIf Division B can buy adaptors from outside the group at $13 per unit, then the
the optimum position is for Division A to sell as many adaptors as possible to external
customers at $15 each and then sell the remainder to Division B at a price to be agreed
between them.
This would mean that Division A continues to sell Division B 150,000 adaptors but
Division B then buys the remaining 30,000 adaptors from an external supplier. This is
because the contribution per unit for Division A’s external sales is $7 ($15 – $3 – $4 –
$1). This means that for every external sale it loses, it forfeits $7 for the group.
However, the incremental cost for the group of Division B buying adaptors from
outside the group is only $6 ($13 external cost less the $7 cost of making them in-house).
So, it makes sense for Division A to satisfy its external sales first before selling
internally.If A sells externally then the company as a whole makes a contribution of $7 per unit.
If instead they sell to B then the company is not making the $7 per unit that they would have made by A selling externally.
Therefore it is better that A does sell externally and does get the $7 for the group because although B needs the units they can buy them elsewhere and only pay $6.
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