Division S 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.
Division B uses Division S's product in its operations. It can purchase the units from Division S at $20 per unit, but must pay a $1.50 per unit in shipping costs. Alternatively, Division B can buy from Divi-sion S's competition at a delivered price of $21 per unit.
Requirements (Be sure to show numerical work): Internal Transfer or External Supply for 1 & 2
1) Situation Internal transfer or external supply From the company's perspective, should Division B purchase the units internally or externally? As-sume Division S has ample capacity to handle all of Division B's needs.
2) Would your answer change if Division S can sell everything it produces to outside customers?