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Purchase internally or externally

The Coat Division of Jones Fashions Manufactures a winter coat with the following standard costs:

Direct Material $40
Direct Labour $60
Overhead $30
Total Unit Cost $130

The standard direct labour rate is $30 per hour, and overhead is assigned at 50% of the direct labour rate. normal direct labour hours are 25,000, and the break down of the $30 per cot overhead is $10 variable and $20 fixed.
The coat sell for $200, and the Coat Division is currently operating at a level of about 21,000 direct labour hours for the year. Transfers in jones fashions are normally made at market price, although the divisional managers are permitted to negotiate a mutually agreed upon transfer price.

The Retail Division currently purchases 3,000 coats annually from the Coat Division at the market price. The divisional manager of the Retail Division can purchase the coats from a foreign supplier for $180. since she is free to select a supplier, she has indicated that she would like to negotiate a new transfer price with the Coat Division. The manager of the Coat division believes that the foreign supplier is attempting to "buy in" by selling the coats at what he considers to be an excessively low price.

Questions:
a) From the viewpoint of the firm, should the Retail Division purchase the coats internally or externally? show calculations and explain

b) From the viewpoint of the Retail Division, should the coats be purchased internally or externally? show calculation and explain.

c) assume that the Coat Division is presently operating at capacity and could sell the coats that it now sells to the Retail Division to external buyers at its usual price. from the viewpoint of the firm, should the Retail Division purchase the coats internally or externally? show calculation and explain.

d) if you were the marketing manager of the Retail Division, what concerns might you have regarding the decision to buy internally or externally?

Solution Summary

The solution explains how to make a decision whether to purchase the units internally or externally

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