Question

Munoz Company has two divisions, A and B. Division A manufactures 6,200 units of product per month. The cost per unit is calculated as follows.

Variable costs	$	7.40
Fixed costs		19.50
Total cost	$	26.90

Division B uses the product created by Division A. No outside market for Division A’s product exists. The fixed costs incurred by Division A are allocated headquarters-level facility-sustaining costs. The manager of Division A suggests that the product be transferred to Division B at a price of at least $26.90 per unit. The manager of Division B argues that the same product can be purchased from another company for $19.40 per unit and requests permission to do so.

Required

1. a-1. How much would the division gain or lose if Division B were to purchase the product from the outside company for $19.40 per unit? (Round your answer to 2 decimal places.)

2. a-2. Is it in the best interest of Munoz Company for Division B to purchase the product from an outside company?

Answer 1

a-1.
If division B purchase the product from outside market at a price 26.90/- per unit it means division B's gain is 7.5/- per unit. because division A is not selling their product at a price lower than 26.90/- per unit.
total gain for division B=6200*7.50=46500/-
Whereas for division A there is no outside market exist for it's product. so, if they are not selling their product to division B it means for division A it is complete loss for 6200 units to the extent of varible cost per unit. because their fixed cost is allocated to headquarter level facility sustaining cost.
loss of division A = 6200*7.40 = 45880/-

oveal gain for Munoj company = 46500-45880 = 620/-

a-2
It is not in the best interest of Munoz company for division B to purchase the product frrom an outside market.
I would suggest that division A should sell their product to division B at a variable cost. because their fixed cost can be allocated to headquarter level.

if division A sell their product to division B at varible cost at 7.40/- per unit,
Division A's gain/loss is nil, because they are selling their product at cost only.

Division B's gain =
outside market price = 19.40/-
internal division price = 7.40/-
gain = 12/- per unit
overal gain for division B =6200*12= 74400/-

Overall gain for Munoj Company = 74400/-

Conclusion-
It is in the best practice in the interest of the Munoj company if they division A sell their product to division B at variable cost.