Federated Manufacturing Inc. (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 10,000 units of part 23-6711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly. The commercial division is expanding its production and now wants to increase its purchases of part 23-6711 to 15,000 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon.

The commercial division can buy part 23-6711 from Advanced Micro Inc. or from Admiral Electric, a customer of the industrial division now purchasing 650 units of part 88-461. The industrial division's sales to Admiral would not be affected by the commercial division's decision regarding part 23-6711.

Industrial division:

Data on part 23-6711:

Price to commercial division ............................................ $185

Variable manufacturing costs ............................................ 155

Price to outside buyers .................................................... 205

Data on part 88-461:

Variable manufacturing costs ........................................... $ 65

Sales price ................................................................... 95

Other suppliers of part 23-6711:

Advance Micro Inc., price ............................................. $200

Admiral Electric, price ................................................... 210

Required

1. What is the proper decision regarding where the commercial division should purchase the additional 5,000 parts and what is the correct transfer price?

2. Assume that the industrial division's sales to Admiral will be canceled if the commercial division does not buy from Admiral. What would be the unit cost to FMI in this case, and would the desired transfer price change?

3. What are the strategic implications of your answer to requirement 1? How can FMI become more competitive in one or more of its divisions?