A company has two divisions, Division A and Division B. Division A has a budget of selling 20,000 number of a particular component X to fetch a return of 20% on the average assets employed. The following particulars of Division A are also known.
|
Particulars |
Amount in Rupees |
|
Fixed Overheads |
5,00,000 |
|
Variable Cost |
Re. 1 per unit |
|
Average Assets – Debtors |
2,00,000 |
|
Inventories |
5,00,000 |
|
Plant |
5,00,000 |
However there is a constraint in marketing and only 1,50,000 units of the component X can be directly sold to the market at the proposed price.
It has been gathered that Division B can take up the balance 50,000 units of component X. A wants a price of Rs. 4 per unit but B is prepared to pay Rs. 2 per unit of X.
Division A has another option on hand, which is to produce only 1,50,000 units of component X. This will reduce the holding of assets by Rs. 2,00,000 and fixed overheads by Rs. 25,000. You are required to advise the most profitable course of action for Division A.