Fedori Corporation has a Parts Division that does work for other Divisions in the company as well as for outside customers. The company's Machinery Division has asked the Parts Division to provide it with 4,000 special parts each year. The special parts would require $23.00 per unit in variable production costs.
The Machinery Division has a bid from an outside supplier for the special parts at $37.00 per unit. In order to have time and space to produce the special part, the Parts Division would have to cut back production of another part-the YR24 that it presently is producing. The YR24 sells for $40.00 per unit, and requires $28.00 per unit in variable production costs. Packaging and shipping costs of the YR24 are $3.00 per unit. Packaging and shipping costs for the new special part would be only $1.50 per unit. The Parts Division is now producing and selling 15,000 units of the YR24 each year. Production and sales of the YR24 would drop by 20% if the new special part is produced for the Machinery Division.
Required:
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 4,000 special parts per year from the Parts Division to the Machinery Division?
b. Is it in the best interests of Fedori Corporation for this transfer to take place? Explain.