Transfer pricing dispute. Tokoyama Corporation manufactures small appliances such as coffee- makers and toasters. It is organized along decentralized lines, with each manufacturing division operating as a separate profit centre. 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 Tokoyama. The Coffee Machines Division has in the past always purchased its requirement of a particular timer component from Timers and Thermostats Division. However, when informed that Timers and Thermostats Division is increasing its selling price to $10, Coffee Machines Division's manager decides to purchase the timer component from outside suppliers. Coffee Machines Division can purchase the component for $8.50 on the open market. Timers and Thermostats Division insists that, because of the recent transfer of its operations to a newly built facility and the resulting high amortization charges, it will not be able to earn an adequate return on its investment unless it raises its price. Timers and Thermostats Division's manager appeals to top management of Tokoyama for support in the dispute with Coffee Machines Division and supplies the following operating data:

REQUIRED 1. Assume there are no alternative uses for internal facilities. Determine whether the company as a whole will benefit if Coffee Machines Division purchases the timer component from outside suppliers for $8.50,per unit.
2. Assume internal facilities of Timers and Thermostats Division would not otherwise be idle. By not producing the 1,000 units for Coffee Machines Division, the Timers and Thermostats Division equipment and other facilities would be used for other production operations that would result in annual cash operating savings of $3,000. Should Coffee Machines Division purchase from outside suppliers?
3. Assume there are no alternative uses for Timers and Thermostats Division internal facilities and that the price from outsiders drops by 20%. Should Coffee Machines Division purchase from outside suppliers?LO1

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Coffee Machines Division's annual purchase of timers: Timers and Thermostats Division's variable cost per timer: Timers and Thermostats Division's fixed costs per timer: $ 1,000 units . 6 -3