Arya Print Products is a subsidiary of Stark Systems. Stark Systems is a multi-national information systems consulting firm. Arya has traditionally provided all of the promotional pamphlets, bound reports, and professional presentation materials used by all of the divisions within Stark Systems.

Sansa Consulting has asked for bids to do the actual production of the promotional materials. Sansa has received two bids.

From Arya Print Products $1,000,000

From Outside Print and Graphics 800,000

For the past year, Arya's operations have run, on average, at 60% of full capacity. The division manager of Arya Print Products reports that $1,000,000 is the market price of this job given the premium quality that her division produces. She also reports that she thinks the $800,000 bid from Outside Print and Graphics represents a one-time, low-ball bid from a low-quality producer. - Finally, the Arya manager estimates that her direct production cost for this job is $790,000, as follows: $400,000 for materials, $225,000 for labor, and $165,000 for direct overhead. [Arya would buy the materials for $400,000 from yet a third Stark Systems division, Brandon Raw Materials. The cost to Brandon of buying these materials would be $250,000, so Brandon would mark the materials up by $150,000 before selling them to Arya.

Assume that you are the division manager of Sansa Consulting. You have received two bids for the production of the promotional materials that you need:

$800,000 from Outside Print and Graphics (a company unaffiliated with the Stark Systems group)

$1,000,000 from Arya Print Products

Question

a. What will happen to your division segment margin if you accept the $1,000,000 Arya Print Products bid instead of the $800,000 Outside bid?

b. Which one of the two bids should you accept? Explain.

c. Do you have any concerns if you act according to b? Explain