James Corp. manufactures AD 234 in its Brandon Division. This output is sold to the Micha Division as raw material in Micha's product. Brandon also further processes the AD234 into AD235, and then sells it to other companies.
The Brandon Division's variable costs for the basic ingredient are $15 per unit. The Micha Division's variable costs are $5 per unit in addition to what it pays the Brandon Division. The Micha Division has a capacity of 400,000 units and it can sell everything it produces. The market price for the finished additive is $40 per unit. If the Brandon Division converts the AD234 into AD235, it can receive $25 per unit on the open market, but it incurs an additional $4 per unit for this processing.
Required:
a. What is the lowest price the Brandon Division should be willing to transfer AD234 to the Micha Division, assuming the Brandon Division is not at full capacity?
b. What is the lowest price the Brandon Division should be willing to transfer AD234 to the Micha Division, assuming the Brandon Division is at full capacity?
c. Ignore parts (a) and (b). Assume that the Brandon Division has a capacity of 500,000 units, but can only sell 300,000 on the open market. How many units should the Brandon Division sell externally and how many units should it sell to Micha Division at a transfer price of $20?