Problem
Sugar Company has two divisions, Lenox and Berkshire. Lenox produces an item that Berkshire could use in it production. Berkshire currently is purchasing 115,000 units from an outside supplier for $42 per unit. Lenox os currently operating at full capacity of 760,000 units and has variable costs of $27 per unit. The full cost to manufacture the unit is $34. Lenox currently sells 760,000 units at a selling price of $46 per unit.
a. What will the effect on Sugar Company's operating profit it the transfer is made internally? Is this more profit or less profit?
b. What will be the change in profits for Lenox if the transfer price is $39 per unit? Is this more profit or less profit?