Reference no: EM13535596

Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division's estimated sales and standard cost data for the year ending December 31, 2005, based on the full capacity of 100,000 units, are as follows:

Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75 per unit during 2005 on a continuing basis. Bradley can purchase its requirements from an outside supplier at a price of $85 per unit.

Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new customer and drop its sales to Bradley for 2005, and why?

1. No, because the gross margin of the corporation as a whole would decrease by $200,000.
2. Yes, because Ajax Division's gross margin would increase by $300,000.
3. Yes, because Ajax Division's gross margin would increase by $600,000.
4. No, because Bradley Division's gross margin would decrease by $800,000.