Question 5 (20 marks} Answer any TWO parts a. (10 marks) Zocco Co which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since Division Bplans to increase its selling price for the same materials to $200. Information for Division A and Division B follows: Outside price for materials $150 Division A's annual purchases 10,000 units Division B's variable costs per unit $140 Division B's xed costs, per year $1,250,000 Division B's capacity utilization 100% Re uired: (1) Will the company benet if Division A purchases outside the company? Assume that Division B cannot sell its materials to outside buyers. (2 marks) (2) Assume that Division B can save $200,000 in fixed costs if it does not manufacture the materials for Division A. Should Division A purchase from the outside market? (2 marks) (3) Assume the situation in requirement (1). If the outside market value for the materials drops $20, should Division A buy from the outside? Explain. (2 marks) (4) What are the advantages of a negotiated transfer price policy? (4 marks) b. (10 marks) Barry Fast Foods Company has been experiencing low protability in recent years. The CEO is currently reviewing the working capital management policy. The company's sales are all on credit and the current credit term is 1! l 0, net 30. The CEO is considering easing the credit term to 2/10, net 40. By easing the term, it is expected that the sales may increase from $400 million to $550 million. Other expected changes are as follows: men; .._..E.Q_Pr0 96d Bad debt as % of sales 2% 4% Days sales Outstanding 34 days 45 days Percentage of sales taking discount 10 20 The variable cost ratio is 70% and cost of fund is 10%. Analyze the proposed change in credit policy and recommend whether the change should be adopted. (10 marks)