The BonMatin Corporation produces all types of bowling balls. The Bowling Ball Division is currently producing 3,750 bowling balls per year with a capacity of 5,200. The variable costs assigned to each bowling ball are $576 and annual fixed costs of the division are $878,500. The bowling balls sell for $1,100. The Regal Bowling Ball Division wants to buy 1,450 bowling balls at $525 for its custom bowling ball business. The Home Bowling Ball manager refused the order because the price is below variable cost. The Regal manager argues that the order should be accepted because it will lower the fixed cost per bowling ball from $234.27 to $168.94 and will take the division to full capacity, thus making operations more efficient. Bowling Ball Division: Production 3,750 bowling balls Sales price per bowling ball $1,100 Annual fixed costs $878,500 Capacity 5,200 bowling balls Variable cost per bowling ball $576
1) Should the order from the Regal Bowling Ball Division be accepted by the Bowling Ball Division? Why? Base your decision on the contribution margin that would be generated by the Regal Division's offer.
2) When looking at this problem, how would the concept of dual pricing come into play? How would this impact transfer pricing?