Chula Vista Pump Company makes irrigation pump systems. The company is divided into several autonomous divisions that can either sell to internal units or sell externally. All divisions are located in buildings on the same piece of property. The pump division has offered the washer division $4 per unit to supply it with the washers for 50,000 units. It has been purchasing these washers for $4.30 per unit from outside suppliers. The washer division receives $4.60 per unit for sales of this type of washer to outside customers. The variable cost of units sold externally by the washer division is $3.20. It estimates that it will save 50 cents per unit of selling expenses on units sold internally to the pump division. The washer division has no excess capacity.

Instructions

(a) Calculate the minimum transfer price that the washer division should accept. Discuss whether it is in the washer division's best interest to accept the offer.

(b) Suppose that the washer division decides to reject the offer. What are the financial implications for each division, and the company as a whole, of the decision to reject the offer?