The Propellers Division of Monte Carlo Sports Company produces propellers for outboard motors. It has been the sole supplier of propellers to the Outboard Motor Division and charges $32 per unit—the current market price for very large wholesale lots. The Propellers Division also sells to outside retail outlets,
at $40 per unit. Normally, outside sales amount to 25 percent of a total sales volume of 1 million pumps per year. Typical combined annual data for the division follows:

The Ocean Eleven Company, an entirely separate entity, has offered the Outboard Motor Division comparable propellers at a firm price of $30 per unit.
The Propeller Division claims that it cannot possibly match this price because it could not earn any margin at $30.
1. Assume that you are the manager of the Outboard Motor Division.
Comment on the Propeller Division’s claim. Assume that normal outside volume cannot be increased.
2. Propeller Division believes that it can increase outside sales by 750,000 propellers per year by increasing fixed costs by $2 million and variable costs by $3 per unit while reducing the selling price to $38. Assume that maximum capacity is 1 million propellers per year. Should the division reject intracompany business and concentrate on outside sales?

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Sales $34,000,000 Variable costs, $26 per pump $26,000,000 Fixed costs Total costs 3,000,000 $29,000,000 Gross margin $ 5,000,000