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Division B has asked Division A of the same company to supply it with 4,000 units of part K932 this year to use in one of its products.
Division B has asked Division A of the same company to supply it with 4,000 units of part K932 this year to use in one of its products. Division B has received a bid from an outside supplier for the parts at a price of $31.00 per unit. Division A has the capacity to produce 10,000 units of part K932 per year. Division A expects to sell 8,000 units of part K932 to outside customers this year at a price of $36.00 per unit. To fill the order from Division B, Division A would have to cut back its sales to outside customers. Division A produces part K932 at a variable cost of $18.00 per unit. In addition, the cost of packing and shipping the parts for outside customers is $3.00 per unit. These packing and shipping costs would not have been incurred on sales of the parts to Division B.
- What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 4,000 parts from Division A to Division B?
- How much would profits change this year for the overall company if this transfer took place?
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