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Ayala Cycle

Price: $1.99


The Cycle Division of Ayala Company has the following per unit data related to its
most recent cycle called Roadbuster.


Selling price   2,200
Variable cost of goods sold
 Body frame   300
Other variable costs   900  1,200
Contribution margin   1,000

Presently, the Cycle Division buys its body frames from an outside supplier. However
Ayala has another division, FrameBody, that makes body frames for other cycle companies.
The Cycle Division believes that FrameBody’s product is suitable for its new Roadbuster cycle.
Presently, FrameBody sells its frames for $350 per frame. The variable cost for FrameBody
is $270. The Cycle Division is willing to pay $280 to purchase the frames from FrameBody.

Instructions
(a) Assume that FrameBody has excess capacity and is able to meet all of the Cycle Division’s
needs. If the Cycle Division buys 1,000 frames from FrameBody, determine the
following: (1) effect on the income of the Cycle Division; (2) effect on the income of
FrameBody; and (3) effect on the income of Ayala.

Effect of income on the Cycle Division
Effect of income of FrameBody
Effect of income of Ayala

(b) Assume that FrameBody does not have excess capacity and therefore would lose sales
if the frames were sold to the Cycle Division. If the Cycle Division buys 1,000 frames
from FrameBody, determine the following: (1) effect on the income of the Cycle Division;
(2) effect on the income of FrameBody; and (3) effect on the income of Ayala.

Effect of income on the Cycle Division
Effect of income of FrameBody
Effect of income of Ayala

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