Question 3

Hawa Ltd. has two divisions: Division A and B. Division A manufactures and sells motors and Division B manufactures components. Division A uses component X in the production of motors, which it purchases from an outsider supplier at a cost of $134 per component.

The Division As manager has asked the manager of Division B about selling component X to Division A. Division B currently manufactures and sells components to outside firms, but the specifications of the component X are slightly different. Producing component X to suit Division As specifications would increase direct material cost by $5.80 per component. In addition, Division B would not incur any variable selling costs in components sold to Division A. The manager of Division A wants all the components X it uses to come from one supplier, and has offered to pay Division B, $125 for each component X. The Division B has capacity to produce 62,000 units of component X.

The budgeted sales volume of Division B is 58,000 units for the coming year without considering Division As proposal. The following information related to Division B is available to you:

Per component in $

Selling price of component

170.00

Direct material cost

22.00

Direct labour cost

13.00

Variable manufacturing overhead cost

11.00

Fixed manufacturing overhead cost

10.00

Variable selling expense

7.00

Fixed selling expense

6.00

Fixed administrative expense

1.00

3a) 14 Marks Assume Division A needs 11,000 units of component X. Should Division B be willing to supply the component X for $125 each? Support your conclusion with calculations.