Both the Dog and the Cat divisions of Pampered Pets, Inc. make squeak toys. The Dog division produces 1,000,000 squeak toys per year while the Cat division produces only 200,000 toys with squeakers but produces 2,000,000 toys without squeakers. Both divisions currently produce their own squeakers that go inside the squeak toys. The Dog and Cat divisions are investment centers and the mangers’ bonuses are partially determined by the division’s profitability. The cost for each division to produce just the squeakers is as follows:

	Dog Division - Squeakers	Cat Division - Squeakers
Variable Production Costs	$.15	$.18
Variable Selling & Admin. Costs*	$.10	$.05
Fixed Production Costs**	$.12	$.10
Fixed Selling & Admin Costs***	$.08	$.09
	$.45	$.42

*.02 per unit can be avoided on internal sells

**are already being met by current production levels, however, 40% are unavoidable at any production level

***25% unavoidable, 75% avoidable

The manager of the Cat division feels that it may be wise to purchase the squeakers needed and free up that capacity to make more non-squeaker toys which have a higher contribution margin than the squeaker toys. The Cat Division manager has approached an outside seller of the squeakers, Sound Makers, Inc., about buying the squeakers. Sound Makers has offered to sell the squeakers to Cat for $0.47each. In the meantime, the manager of Dog Division, has also offered to sell the squeakers to the Cat division as the Dog Division already sells squeakers to outside buyers for $0.50 per unit.

Required:

A. What are three qualitative issues the manager of Cat Division should consider before buying the squeakers instead of making them?

B. Assuming the Dog Division is not operating at capacity when making squeakers, what is preferred price at which Dog Division would want to transfer the squeakers to Cat Division? Explain.

C. Assuming the Dog Division is operating at capacity when making squeakers and is meeting its own demands plus the demands of current external customers what is preferred price at which Dog Division would want to transfer the squeakers to Cat Division? Explain.

D. At what preferred price would Cat Division want to purchase the squeakers from Dog Division? Explain.

Answer rating: 100% (QA)

A Following are the qualitative issues the manager of cat division should consider before buying the ... View the full answer