North Carolina Company Produces Computers and Computer Components

Essay

North Carolina Company produces computers and computer components.The company is organized into several divisions that operate essentially as autonomous companies.The firm permits division managers to make investment and production-level decisions.The division managers can also decide whether to sell to other divisions or to outside customers.Networks Division produces a critical component for computers manufactured by Computers Division.It has been selling this component to Computers for $3,000 per unit.Networks recently purchased new equipment for producing the component.To offset its higher depreciation charges,Networks increased its price to $3,200 per unit.The manager of Networks has asked the president to instruct Computers to purchase the component for the $3,200 price rather than to permit Computers to purchase externally for $3,000 per unit.The following information is obtained from the company's records: Computers' annual purchases of the component,400 units;Networks' variable costs per unit,$2,400;Networks' fixed costs per unit,$400.
Required:
a.Assume that the firm has no alternative uses for Networks' idle capacity.Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain.
b.Assume that the firm can use the idle capacity of Networks for other purposes,resulting in cash operating savings of $150,000.Will the company as a whole benefit if Computers purchases the component externally for $3,000? Explain.
c.Assume the same facts as in part b.except that the outside market price drops to $2,800 per unit.Will the company as a whole benefit if Computers purchases the component externally for $2,800? Explain.
d.As president,how would you respond to the manager of Networks? Discuss each scenario described in parts a. ,b. ,and c.