Calculation of Contribution margin: Total Motors Price Per Unit Less: VC of Processing Less: Price paid to Bayside Contribution 3,500 Per Unit Total $1,250 $4,375,000 400 1400000 500 1750000 $350 $1,225,000 Calculation of Contribution margin of Bayside Division on supply to Cole Division Transfer Price to Cole Less: VC Contribution Per Unit Per Unit Total 500 1750000 250 875000 250 875000 In that case Diamond division will buy motors from London Company and London company will buy component from Bayside: Calculation of contribution margin of Bayside on that order: Selling Price to London Motors Less: VC Contribution Per Unit Total Contribution received in that case = Per Unit Total 400 1200000 200 600000 200 600000 $2,700,000 Less: Price paid to London company less Price paid by London company to Bayside: Price paid to London Less: Price paid to Bayside Total Price paid to London Per Unit 400 Total 1500 $4,500,000 1200000 1100 $3,300,000 ($600,000) Net Benefit Option 2: If Cole division sell Motor to Diamond division: Price Less: VC Less: Price paid to Bayside Per Unit Total 1500 4500000 500 1500000 600 1800000 400 1200000 Contribution Contribution of Bayside division: Per Unit Total Price 600 1800000 Less: VC 300 900000 Contribution 300 900000 Total Contribution 2100000 Less: Lost contribution of Wales sales $2,700,000 Net Benefit ($600,000) Financial calculaitons shows that company is indifferent in both options. So, can choose either of option. on the basis of factors other than monetary. But the company should consider all the pros and cons of each alternative. If Cole division take decision to sell motors to Diamond division than there will be loss of an outsider customer. Wales company has an order of 3,500 units which is 500 more than the requirement of Diamond division. So there will be loss of 500 extra units of sales. Further selling to Wales division may results in building a long term relationship with the company and this order may be converted in a long term regular order. Than there are chances of increase in the size of order. But there are negative side of this too. If the company decide to sell to Wales company than Diamond division will purchase motors from London company. This will make it difficult to have quality check on the product. Inspection and quality control will become difficult. Payment terms difference between an outsider supplier and an inhouse division is also a significant factor. Inhouse purchase may result in a more liberal credit terms and also Cole division will have guarantee of payment which is not possible in case of an outside customer. So, all these strategic factors must be considered by Cole division, Diamond division as well as management as a 2 whole before taking any decision.