Internal or External Acquisitions: No Opportunity Costs The Van Division of Moto

Question

Internal or External Acquisitions:
No Opportunity Costs
The Van Division of MotoCar Corporation has offered to purchase 180,000 wheels from the Wheel Division for $42 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

The Wheel Division has been selling 500,000 wheels per year to outside buyers at $59 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $55 per wheel.

(a) Calculate the net benefit (or cost) to the Wheel Division of accepting the offer from the Van Division.
$Answer per wheel

(b) Calculate the net benefit (or cost) to Motocar Corp. if the Wheel Division accepts the offer from the Van Division.
$Answer per wheel

Explanation / Answer

a. Net benefit to Wheel Division = Selling price - Variable cost = (42 - 30 ) x 180,000 = $ 2,160,000

b. Net benefit to Motorcar Corp. = ( 55 - 30) x 180,000 = $ 4,500,000

Fixed costs have not been considered as these are allocated and unavoidable costs.

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