This question has three parts (2 points per part). Gavin Corporation has two divisions (A &...

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This question has three parts (2 points per part). Gavin Corporation has two divisions (A & B), whose managers are evaluated independently based, in part, upon their own division's net operating income. Each year, Gavin Corporation's Division A makes and sells 90,000 units of a part to unrelated outside customers for a selling price of $57 per unit. The variable costs for Division A to make the part is $32 per unit. Division A has the capacity to make 100,000 units of the part each year at a variable cost of $32 per unit, but current demand from the unrelated outside customers is for only 90,000 units each year. Note there would be no additional fixed costs if Division A production was increased from 90,000 to 100,000 units per year. Gavin Corporation's Division B currently buys 5,000 units of a comparable part each year from an unrelated outside supplier for $40 per unit. The owners of Gavin Corporation have just discovered that the part Division A makes could be substituted for the part Division B currently buys from the unrelated outside supplier. As such, the owners of Gavin Corporation would like to make more company-wide net operating income, so has encouraged managers of Divisions A and B to work together so that Gavin Corporation can be more profitable. Part 1. If the Division managers were permitted to negotiate the transfer price Division B pays Division A for the part, what maximum price per unit would you expect Division B would be willing to pay to Division A for each unit? Part 2. If the Division managers were permitted to negotiate the transfer price Division B pays Division A for the part, what minimum price per unit would you expect Division A would require from Division B for each unit? Part 3. How much additional net operating income can the Gavin Corporation as a whole earn if Division B starts buying all 5,000 units of the part from Division A, rather than buying 5,000 units from the unrelated outside supplier? This question has three parts (2 points per part). Gavin Corporation has two divisions (A & B), whose managers are evaluated independently based, in part, upon their own division's net operating income. Each year, Gavin Corporation's Division A makes and sells 90,000 units of a part to unrelated outside customers for a selling price of $57 per unit. The variable costs for Division A to make the part is $32 per unit. Division A has the capacity to make 100,000 units of the part each year at a variable cost of $32 per unit, but current demand from the unrelated outside customers is for only 90,000 units each year. Note there would be no additional fixed costs if Division A production was increased from 90,000 to 100,000 units per year. Gavin Corporation's Division B currently buys 5,000 units of a comparable part each year from an unrelated outside supplier for $40 per unit. The owners of Gavin Corporation have just discovered that the part Division A makes could be substituted for the part Division B currently buys from the unrelated outside supplier. As such, the owners of Gavin Corporation would like to make more company-wide net operating income, so has encouraged managers of Divisions A and B to work together so that Gavin Corporation can be more profitable. Part 1. If the Division managers were permitted to negotiate the transfer price Division B pays Division A for the part, what maximum price per unit would you expect Division B would be willing to pay to Division A for each unit? Part 2. If the Division managers were permitted to negotiate the transfer price Division B pays Division A for the part, what minimum price per unit would you expect Division A would require from Division B for each unit? Part 3. How much additional net operating income can the Gavin Corporation as a whole earn if Division B starts buying all 5,000 units of the part from Division A, rather than buying 5,000 units from the unrelated outside supplier?

Answer rating: 100% (QA)

Part 1 Division B would be willing to pay Division A up to the maximum price it currently pays ... View the full answer