Reference no: EM132620314

Division N has asked Division M of the same company to supply it with 10,000 units of part P728 this year to use in one of its products. Division N has received a bid from an outside supplier for the parts at a price of $25.00, per unit. Division M has the capacity to produce 50,000 units of part P728 per year. Division M expects to sell 46,000 units of part P782 to outside customers this year at a price $26,00 per unit. To fill the order from Division N, Division M would have to cut back its sales to outside customers. Division M produces part P782 at a variable cost of $17.00 per unit. The cost of packing and shipping the parts for outside customers is $1.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division N.

Required:

Question a. What is the range of transfer prices within which both the Divisions' profits would increase as a result of agreeing to the transfer of 10,000 parts this year from Division M to Division N?

Question b. Is it in the best interests of the overall company for this transfer to take place? Explain.