The Domino Company has two decentralized divisions, A and B. Division A has always
purchased certain units from Division B at $75 per unit. Because Division B plans to raise the
price to $100 per unit, Division A desires to purchase these units from outside suppliers for $75
per unit. Ilivision B’s costs follow:
|
Division B’s variable costs per unit |
$70 |
|
Division B’s annual fixed costs |
$15,000 |
|
Division A’s purchase |
1,000 units |
If Division A buys from an outside supplier, the facilities Division B uses to manufacture these
units will remain idle. Would it be more profitable for the company to enforce the $100 transfer price
than to allow Division A to buy from outside suppliers at $75 per unit?