Buying from Inside or Outside the Company E & B Company has two divisions, processing and finishing. The Finishing Division has been purchasing certain products from the Processing Division at a price of $80 per unit. (A unit consists of 100 yards of material.) The Processing Division has announced that, starting next month, it will raise its price to $100 per unit. As the manager of the Finishing Division, you object to this price and have indicated that you are planning to purchase these units of material from outside suppliers at a price of $85 per unit. You have asked the accounting department to furnish cost data to help you understand why the Processing Division’s price has to be raised to $100 per unit. Following is the information supplied about the Processing Division’s operations:

If the Finishing Division buys from outside suppliers, the facilities used by the Processing Division to manufacture these units for the Finishing Division will remain idle.
Answer the following questions:
1. If the Processing Division is successful in imposing the $100 price and the Finishing Division elects to buy from outside suppliers, what impact does this action have on the overall profit of E & B Company?
2. Explain why the variable production costs, the fixed costs, and the normal profit are, or are not, each relevant to this decision. (You are not being asked to discuss whether the $100 price is an appropriate price or whether the division managers should be allowed to maintain an autonomous posture in this decision.)
3. What additional factors should E & B Company’s top management consider in resolving this matter?

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Units produced for Finishing Division 2,000 Variable production costs per unit $60 Indirect fixed costs allocated to the Processing Division $50,000 Normal profit per unit in Processing Division $15