The EKTA’s main competitor does not manufacture their bicycle frames. They purchase the frames from outside suppliers for their Assembly Division. Do you believe that this difference in operations gives either EKTA or their competitor a pricing advantage over the other?

Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter11: Differential Analysis And Product Pricing
Section: Chapter Questions
Problem 2CMA
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The EKTA Company, founded in 1992, is a manufacturer and exporter of
high-end bicycles. Its assembly division buys bicycle frames from the frame
division and assembles the bicycles.
The frame division, which is operating at capacity, incurs an incremental
manufacturing cost of $65 per frame. The frame division can sell all its output to the outside market at a price of $100 per frame, after incurring a variable marketing and distribution cost of $8 per frame. If the assembly division purchases frames from outside suppliers at a price of $100 per frame, it will incur a variable purchasing cost of $7 per frame. EKTA’s division managers can act autonomously to maximize their own division’s operating income.

The EKTA’s main competitor does not manufacture their bicycle
frames. They purchase the frames from outside suppliers for their
Assembly Division. Do you believe that this difference in operations
gives either EKTA or their competitor a pricing advantage over the
other?

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