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 $40 per wheel. At a normal volume of 500,000 wheels per year, production costs per wheel for the Wheel Division are as follows:

Direct materials $15
Direct labor 11
Variable overhead 6
Fixed overhead 18
Total $50
The Wheel Division has been selling 500,000 wheels per year to outside buyers at $60 each. Capacity is 700,000 wheels per year. The Van Division has been buying wheels from outside suppliers at $56 per wheel.

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

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

A. Profit per wheel      = $8

B. Total benefit to Motor Corp. = $4,320,000

Explanation:

Requirement A

We can calculate the net benefit/cost to the wheel division of accepting the offer from van division  by deducting all the variable cost from the selling price offered by van division

Selling price           = $40

Direct material        = $15

Direct labor             = $11

Variable Overhead = $6

Profit per wheel      = $8

Requirement B Net benefit to Motor car corp.

Increased the profit of wheel division by accepting the offer

180,000 x $8 =$1,440,000

Savings of van division by placing an order to wheel division

180,000 x $16(w) = $2,880,000

Total benefit to Motor Corp. = $1,440,000 + $2,880,000

Total benefit to Motor Corp. = $4,320,000

Working

Outside supplier price - Price offered by van division

$56 - $40

$16

15 pounds of apples and 6 cups of flour

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