M23-20 Eclectic Art Company Eclectic Art Company has a Print Division that is cu
ID: 2471737 • Letter: M
Question
M23-20 Eclectic Art Company
Eclectic Art Company has a Print Division that is currently producing 100.000 prints per a capacity of 150,000 prints. The variable costs of each print are $32. and the annual for $1,350,000. The prints sell for $48 in the open market. The company's Retail Division wants to buy 50,000 prints at $27 each. The Print Division manager refuses the order because the price is below variable cost. The Retail Division manager argues that the order should be accepted because it will lower the fixed cost per print from S9 to $6. Required Should the Retail Division order be accepted? Why or why not? From the viewpoints of the Print Division and the company, should the order be accepted it the manager of the Retail Division intends to sell each print in the outside market for $44 after incurring additional costs of $10 per print? What action should the company take, assuming it believes in divisional autonomy?Explanation / Answer
a) Should not accept retail division order. Sinnce price is lower than variable cost. It decreases cost per unit of fixed cost but not decreases the entire fixed cost. Hence due to this order total cost of the print division will be increased.
b) Print division can sell with minimum price of $32 and maximum price of $34 ($44-$10) since, retail division has to spent $10 on each print and its maximum selling price is $44.
c) Price of $33 is reasonable for each division. Since it reduces the fixed cost of $1 per unit to print division and gives profit of $1 to retail division.
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