Transfer-pricing dispute. The Allison-Chambers Corporation, manufacturer of tractors

/ and other heavy farm equipment, 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 Allison-Chambers. 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 $180, Division C’s manager decides to purchase the engine component from outside suppliers.

Division C can purchase the component for $162 on the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high amortization 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 Allison-Chambers for support in the dispute with Division C and supplies the following operating data:

C’s annual purchases oftractor-engine component 1,000 units A’s variable costs per unit oftractor-engine component $144 A’s fixed costs per unit oftractor-engine component $ 24 Required 1. Assume that there are no alternative uses for internal facilities. Determine whether the company as a whole will benefit if Division C purchases the component from outside suppliers for $162 per unit.

2. Assume that internal facilities of Division A would not otherwise be idle. By not producing the 1,000 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

$21,600. $hould Division C purchase from outside suppliers?

3. Assume that there are no alternative uses for Division A’s internal facilities and that the price from outsiders drops $24. $hould Division C purchase from outside suppliers?