Bradford Manufacturing Ltd. manufactures custom metal perforating and fabricating. Its Fabricating Division can transfer the perforated metal components to Bradford's Automotive Division or it can sell its products on the external market, which is competitive. Fabricating currently produces and sells 350,000 units per year to the external market at a price of $38 per unit. Variable and fixed costs of production equal $24.50 and $8.50/unit, respectively. Fabricating incurs $2.50 of variable selling costs on external sales. Fixed costs are based on the capacity of the plant which is 400,000 per year. The Automotive Division is interested in acquiring up to 50,000 units per year.

Q. From the standpoint of Bradford Manufacturing Ltd., should the units be transferred? Explain why.

Q.What is the minimum transfer price Fabricating should accept? What is the range of acceptable transfer prices?

Now assume that demand in the external market for the Fabricating Division's components is expected to increase by 8%.The Automotive Division has negotiated with an external supplier to supply 50,000 units at a price of $34.50/unit. However, if the Automotive Division reduces its volume below the 50,000 unit volume, it must pay $39 per unit.

Q.What are the different sourcing options that Bradford should consider?

Q.Which of the options represents the optimum sourcing arrangement for Bradford, and why? Provide clear, quantitative justifications.