The manager of division X of a company has given a production budget of 2,00,000 units of components, to be manufactured at a price which will provide a return of 25% on the average assets employed in the division.
Following are the relevant data in relation thereto:
|
Variable Cost |
Re. 1 per Unit |
|
Fixed Overheads |
Rs. 4,00,000 |
|
Average Assets Employed: |
|
|
Stocks |
Rs. 6,00,000 |
|
Debtors |
Rs. 2,00,000 |
|
Fixed Assets |
Rs. 4,00,000 |
However, the marketing department of the company considers that the maximum units of the components the market can take at the proposed price is 1,40,000 only.
The production manager of division Y is ready to purchase 60,000 units of the component at a price of Rs. 2.25 per unit, as he feels that the component can be manufactured in his division at that price.
The manager of division X feels that rather than selling at Rs. 2.25 per unit, he would restrict the production in his division to 1,40,000 units only. By this, he feels that he could reduce Rs. 80,000 in stocks, Rs. 30,000 in debtors and Rs. 90,000 in plant and also reduce selling expenses by Rs. 40,000.
You are required to work out whether 60,000 units should be produced for a transfer to Division Y at Rs. 2.25.