Department A sells its product to unrelated parties at a price of $20 per unit. It incurs variable costs of $7 per unit and has fixed costs of $50,000 per month. Monthly production is generally 10,000 units.
Deparment R uses Department A's product in its operations. It can purchase the units from Deparment A at $20 per unit, but must pay a $1.50 per unit in shipping costs. Alternatively, Department R can buy from Department A's competition at a delivered price of $21 per unit.
Requirements (Be sure to show numerical work)
Situation Internal transfer or external supply
From the company's perspective, should Department R purchase the units internally or externally? Assume Department A has ample capacity to handle all of Department R's needs.
Would your answer change if Department A can sell everything it produces to outside customers?