Ajax division of Carlyle Corporation produces electric motors, 20% of which are sold to the Bradley division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as transfer price. Ajax division's estimated sales and standard cost data for the year, based on its full capacity of 100,000 units are as follows:

Ajax has an opportunity to sell the 20,000 units to an outside customer at a price of $75 per unit on a continuing basis. Bradley can purchase its requirements from an outside supplier for $85 per unit.

REQUIRED
Assuming that Ajax division desires to maximize its gross margin, should Ajax accept the new customer and drop its sales to Bradley for the year? Why or why not?

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Sales Variable costs Fixed costs Gross margin Unit sales Bradley $900,000 (900,000) (300,000) $(300,000) 20,000 Outsiders $8,000,000 (3,600,000) (1,200,000) $3,200,000 80,000