Question

Zurich Équipement, SA, a Swiss transportation equipment manufacturer, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal or external customers. The Lucerne division has always acquired a certain equipment component from the Geneva division. The Geneva division recently acquired specialized equipment that is used primarily to make this component. The Geneva division has informed the Lucerne division that its fixed costs have increased by CHF 25 per unit because of the depreciation charges on the new equipment, so the unit price will be increased to CHF 325. However, the Lucerne division’s management has now decided to purchase the component from outside suppliers at a price of CHF 300.
The Geneva division has supplied the following production cost data for this component:
Annual production of component (all for sale to Lucerne division) 3,000 units
Geneva’s variable costs per unit CHF 280
Geneva’s fixed costs per unit CHF 40
1. Suppose there are no alternative uses of the Geneva facilities and that fixed costs will continue if Geneva no longer produces the component for Lucerne. Will the company as a whole benefit if the Lucerne division buys from the outside suppliers for CHF 300 per unit? Show computations to support your answer.
2. Suppose there is an alternative use for the Geneva facilities. If the Geneva facilities are used to produce the component for the Lucerne division, the Geneva division will give up a contribution of CHF 85,000 from this alternative use. Should the Lucerne division purchase from outsiders at CHF 300 per unit?
3. Suppose that there are no alternative uses for Geneva’s internal facilities and that the outsiders’ selling price drops by CHF 50 to CHF 250. Should the Lucerne division purchase from outsiders?
4. As the president, how would you respond if the Geneva division manager requests that you require the Lucerne division to purchase the component from Geneva? Would your response differ depending on the specific situations described in numbers 1–3? Why?



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  • CreatedNovember 19, 2014
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