Assume the Technological Division of ABC Inc. is selling 350,000 units of SB227 on the outside market and that the Sub-Assembly Division can use 100,000 units of SB227. Also assume the division managers have decision-making autonomy in their respective divisions.

The manager of the Technological Division has an offer from an outside firm to provide a component equivalent to the SB227 for $34 each. The outside firm has enough capacity to supply all of ABC Inc.'s current demand for the SB227, both internal and external.

In its place, the Technological Division manager has an opportunity to launch the manufacture of a circuit board with a more powerful microprocessor called the CX140. There is a current outside demand for 30,000 of these units at a cost of $275 each. Variable costs per unit are as follows:

Direct materials $53

Direct labour $40

Variable overhead $65

Additional equipment will have to be purchased with an annual fixed operating cost of

$400,000. This will eliminate 20% of existing fixed operating costs in the Technological Division.

Required:

a) Assuming the Technological Division will offer to transfer the SB227 at cost to the Sub- Assembly Division, determine whether the Technological Division should purchase the units from the outside firm and use the released capacity to manufacturing the CX140.

b) How would your decision change if the outside firm charges the Technological Division $36 per unit of the component similar to the SB227?