Question

Division A of Jindal and Co., is the only source of supply for an intermediate product, IPRO, that can potentially be converted by Division B into a finished product, FPRO. There is no outside market for IPRO. If A decides to produce IPRO, it can produce 60,000 units per month after spending variable costs of $12.00 per unit. As an alternative, without any change in its monthly fixed costs, it can produce and sell (in the outside market) 60,000 units per month of a new product, ANPRO, for a contribution of $8 per unit. The above two options are the only opportunities available to A.

If Division B decides to convert IPRO into FPRO, it will need one unit of IPRO to manufacture one unit of FPRO and it can then sell 60,000 units of FPRO at a selling price of $48 per unit after spending an additional $10 per unit in variable costs. As an alternative, without any change in its monthly fixed costs, B can produce and sell 40,000 units per month of a new product, BNPRO, using components bought from outside, for a contribution of $21 per unit. Again, assume that these are the only two opportunities that B has.

Assume a centralized setup. Jindal and Co. should

		make and sell 60,000 units of ANPRO and shut down Division B
		make and sell 60,000 units of ANPRO and 40,000 units of BNPRO
		make and convert 60,000 units of IPRO to 60,000 units of FPRO and sell FPRO
		make and sell 40,000 units of BNPRO and shut down Division A

Answer 1

Contribution by making IPRO and selling FPRO is:

Particulars	With IPRO
Selling price Division B	$                 48
Less:
Division B variable costs	$                (10)
Division A variable costs	$                (12)
Contribution per unit	$                 26
× total units	60,000
Total contribution	$    1,560,000

Contribution without IPRO is:

Particulars	With out IPRO
ANPRO contribution per unit	8
× total units	60,000
Contribution from ANPRO	480,000
BNPRO contribution per unit	21
× total units	40,000
Contribution from BNPRO	840,000
Total contribution	1,320,000

It is better to go with IPRO and selling FPRO by convertint it.

Answer is:

make and convert 60,000 units of IPRO to 60,000 units of FPRO and sell FPRO

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