Reference no: EM132775674

Computer Solutions Corporation manufactures and sells various high-tech office automation products. Two divisions of Office Products Inc. are the Computer Chip Division and the Computer Division. The Computer Chip Division manufactures one product, a "super chip," that can be used by both the Computer Division and other external customers.

The following information is available on this month's operations in the Computer Chip Division:

Selling price per chip $50

Variable costs per chip $20

Fixed production costs $60,000

Fixed SG&A costs $90,000

Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but instead pays $45 to an external supplier for the 4,000 chips it needs each month.

Problem 1: If a transfer between the two divisions is arranged next period at a price (on 4,000 units of super chips) of $40, total profits in the Computer Chip division will

Option 1: drop by $40,000 compared to the prior period
Option 2: drop by $20,000 compared to the prior period
Option 3: rise by $20,000 compared to the prior period
Option 4: rise by $80,000 compared to the prior period