Explain whether frame division manager should accept offer

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Question - The Assembly Division of Hunter Valley Bicycles Company has offered to purchase 90 000 frames from the Frame Division for $170 per unit. At a normal volume of 250 000 frames per year, production costs per frame are as follows:

Direct materials

$80

Direct manufacturing labour

40

Variable factory overhead

24

Fixed factory overhead

40

Total

$184

The Frame Division has been selling 250 000 frames per year to outside buyers at $230 each; capacity is 350 000 frames per year. The Assembly Division has been buying frames from outside sources for $225 each.

Required:

a) Explain whether the Frame Division Manager should accept the offer.

b) Explain whether, from the company's perspective, the internal sales will be of any benefit.

Reference no: EM131720550

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