Rey Enterprises has just opened a new division (Weatherly). One of their other d

Question

Rey Enterprises has just opened a new division (Weatherly). One of their other divisions (Brinkley) makes a part that could be used in one of Weatherly's products.

You have the following information:

a. What's the maximum amount Weatherly would be willing to pay Brinkly?Rey Enterprises is unwilling to increase capacity. All variable selling costs would be avoided on an intracompany transfer.

b. What's the minimum amount Brinkly would be willing to charge Weatherly?

c. Whats the overall impact (financially) on Rey Enterprises if the parts are made internally?

d. At what point would it not be cost effective for Rey Enterprises to produce the part internally?

Brinkley Information: Production Capacity 100,000 Parts per year Currently selling 80,000 Parts per year Selling price $60 Per part Variable costs Manufacturing $30 Per part Selling $2 Per part Fixed costs $3,000,000 Per part Weatherly Division: Quantity needed 40,000 Parts per year Price from outside supplier $48 Per part

Explanation / Answer

a)The maximum amount Weatherly would be willing to pay Brinkly = $48 per part

..

b)The minimum amount Brinkly would be willing to charge Weatherly = Relevant Cost

= Variable Manufacturing Cost

= $30 per part

..

c)If the parts are made internally , Rey Enterprise's Quarterly Profit will increase by = (48-30)*20,000

= $360,000

..

d)At what point would it not be cost effective for Rey Enterprises to produce the part internally = After 20,000 units

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