The Jill-Farley Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division’s output both to outsiders and to other divisions of Jill-Farley. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $145, division C’s manager decides to purchase the engine component from external suppliers.

Division C can purchase the component for $120 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A’s manager appeals to top management of Jill-Farley for support in the dispute with division C and supplies the following operating data:

Required

1. Assume that internal facilities of division A would not otherwise be idle. By not producing the 1,800 units for division C, division A’s equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $21,000. Should division C purchase from external suppliers? Show your computations.
2. Assume that there are no alternative uses for division A’s internal facilities and that the price from outsiders drops by $20. Should division C purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions’ best interests take actions that are also in the best interest of the company as a whole?

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C's annual purchases of the tractor-engine component A's variable cost per unit of the tractor-engine component A's fixed cost per unit of the tractor-engine component 1,800 units $ 110 $ 20