Bombardier SA, a Swiss transportation equipment manufacturer, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal or external customers. The Obwalden division has always acquired a certain equipment component from the Valais division. The Valais division recently acquired specialized equipment that is used primarily to make this component. The Geneva division has informed the Lucerne division that their fixed costs have increased by CHF 20 per unit because of the depreciation charges on the new equipment, so the unit price will be increased to CHF 295. However, the Obwalden division's management has now decided to purchase the component from outside suppliers at a price of CHF 275. The Valais division has supplied the following production cost data for this component:

Annual Production of components (all for sale to Obwalden division) 2,500 units

Valaiss variable costs per unit CHF 260

Valaiss fixed costs per unit CHF 20

Requirement:

1. Suppose there are no alternative uses of the Valais facilities and that fixed costs will continue if Valais no longer produces the component for Obwalden. Will the company as a whole benefit if the Obwalden division buys from the outside suppliers for CHF 275 per unit? Show computations to support your answer.

2. Suppose there is an alternative use for the Valais facilities. If the Valais facilities are used to produce the component for the Obwalden division, the Valais division will give up a contribution of CHF 80,000 from this alternative use. Should the Obwalden division purchase from outsiders at CHF 275 per unit?

3. Suppose that there are no alternative uses for Valais's internal facilities and that the outsiders' selling price drops by CHF 20 to CHF 255. Should the Obwalden division purchase from outsiders?

4.As the president, how would you respond if the Valais division manager's requests that you require the Obwalden division to purchase the component from Valais? Would your response differ depending on the specific situations described in numbers 1-3? Why?