4. (a) A company is organized into two large Divisions. Division 'A' produces a component which...

  

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4. (a) A company is organized into two large Divisions. Division 'A' produces a component which is used by Division 'B' in making a final product. The final product is sold for 400 each. Division A has a capacity to produce 2,000 units and the entire quantity can be purchased by Division B. Division A informed that due to installation of new machines, its depreciation cost had gone up and hence wanted to increase the price of the component to be supplied to Division B to *220. Division B, however can buy the component from the outside market at 200 each. The variable costs of Division A are 190 and fixed costs 20 per component. The variable costs of Division B in manufacturing the final product by using the component is 150 (excluding the component cost). Present statement indicating the position of each Division and the company as a whole taking each of the following situations separately. (i) If there are no alternative use for the production facilities of A, will the company benefit if Division B buys from outside suppliers at * 200 per component? (ii) If internal facilities of A are not otherwise idle and the alternative use of the facilities will give an annual cash operating saving of 30,000 to Division A, should Division B purchase the component from outside suppliers? (iii) If there are no alternative used for the production facilities of Division A and the selling price for the component in the outside market drops by 15, should Division B purchase from outside suppliers? (iv) What transfer price would you fix for the component in each of the above circumstances? [10] 4. (b) The sales Manager of the Electronic Toy Company is considering two toys: a doll and a game. The toys have discrete probability distribution of cash inflows in each of the next three years. Probability Event Prosperity Doll (3) 20,000 Game 42,000 0.2 Normal 15,000 0.5 20,000 Recession 9,000 0.3 (5,000) (1) For each toy item, compute The expected value of the cash inflow in each of the next three years. The standard deviation (ii) Which toy would you select and why? [5] 4. (a) A company is organized into two large Divisions. Division 'A' produces a component which is used by Division 'B' in making a final product. The final product is sold for 400 each. Division A has a capacity to produce 2,000 units and the entire quantity can be purchased by Division B. Division A informed that due to installation of new machines, its depreciation cost had gone up and hence wanted to increase the price of the component to be supplied to Division B to *220. Division B, however can buy the component from the outside market at 200 each. The variable costs of Division A are 190 and fixed costs 20 per component. The variable costs of Division B in manufacturing the final product by using the component is 150 (excluding the component cost). Present statement indicating the position of each Division and the company as a whole taking each of the following situations separately. (i) If there are no alternative use for the production facilities of A, will the company benefit if Division B buys from outside suppliers at * 200 per component? (ii) If internal facilities of A are not otherwise idle and the alternative use of the facilities will give an annual cash operating saving of 30,000 to Division A, should Division B purchase the component from outside suppliers? (iii) If there are no alternative used for the production facilities of Division A and the selling price for the component in the outside market drops by 15, should Division B purchase from outside suppliers? (iv) What transfer price would you fix for the component in each of the above circumstances? [10] 4. (b) The sales Manager of the Electronic Toy Company is considering two toys: a doll and a game. The toys have discrete probability distribution of cash inflows in each of the next three years. Probability Event Prosperity Doll (3) 20,000 Game 42,000 0.2 Normal 15,000 0.5 20,000 Recession 9,000 0.3 (5,000) (1) For each toy item, compute The expected value of the cash inflow in each of the next three years. The standard deviation (ii) Which toy would you select and why? [5]

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Answer 2 a i Statement of contribution a When component is purc... View the full answer