Suppose Division B of the ABC Company can buy component 216 needed in the manufacture of Division B’s product from Division S of the ABC Company or from an outside supplier, XYZ Company. XYZ Company charges the going market price, $600 for component 216 as does Division S. Division S incurs $360 of variable cost to manufacture component 216. If Division B buys from XYZ Company, XYZ Company will turn around and buy a subcomponent 2167 from Division L of ABC Company for $420. Division L incurs $160 of variable cost to manufacture subcomponent 2167.

Required:

a If Division S is operating below capacity, from whom should Division B purchase component 216 from the perspective of the ABC Company as a whole?

b What synthetic market price should be selected to ensure optimization by the ABC Company as a whole?

¢ If Division S is operating at capacity, from whom should Division B purchase component 216 from the perspective of the ABC Company as a whole?

d What synthetic market price should be selected to ensure optimization by the ABC Company as a whole?