No Opportunity Costs The Van Division of MotoCar Corporation has offered to purc

Question

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

Direct materials $15 Direct labor 10 Variable overhead 5 Fixed overhead 19 Total $49

Explanation / Answer

30

.

But in the given situation as the Wheel division is recovering total Fixed OH from 500,000 units right now. So it need not calculate Fixed OH for the Addititonal Production as the present 500,000 units are sold outside and the additional 180,000 are forr the companies own division

There fore

The Net Benefit for the Wheel Divisionn = 180000*(42-30) = $2,160,000.00

The Net Benefit for the Van Division = 180000*(55-42) = $2,340,000.00

Note:- In the Table 1st coloumn represents the given calculation, 3nd coloumn represents the Actual Calculation.

Production (in units) 500000 180000 Particulars Amount($) Amount($) Amount($) Direct Material 15 15 15 Direct Labour 10 10 10 Variable OH 5 5 5 Fixed OH 19 53 0 Total Production Cost 49 83

30

.

Actual Production Capacity is 700000 units Present Production is 500000 units So, the Fixed cost remains same till 700000 units i.e., $ 19*500000= $9,500,000.00 There fore the Fixed cost per unit, if the production is 680,000 units = $9,500,000.00/680,000 = $13.97 i.e., $14

But in the given situation as the Wheel division is recovering total Fixed OH from 500,000 units right now. So it need not calculate Fixed OH for the Addititonal Production as the present 500,000 units are sold outside and the additional 180,000 are forr the companies own division

Here the Van Division of Motocar Division has offered $42 p.u But the Production cost for the Marginal Produciton per unit = $30

There fore

The Net Benefit for the Wheel Divisionn = 180000*(42-30) = $2,160,000.00

The Net Benefit for the Van Division = 180000*(55-42) = $2,340,000.00

Note:- In the Table 1st coloumn represents the given calculation, 3nd coloumn represents the Actual Calculation.

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