Division B has just come up with a new product. Division S can supply an intermediate product to division B at a transfer price equal to the absorption cost of $5 per unit that includes a $3 fixed cost per unit and a $2 variable cost per unit. Assume that division S has idle capacity. Also, assume that division B has additional variable processing costs of $4 and that the sales price of the final product would be $8 per unit. Each division makes decisions that maximize their own profits. (Assume that there is no other source for the intermediate product.)

1. Will division B make the new product (i.e., will division B buy from division S?)

2. Is it in the companys best interests that division B produce the new product (i.e., is an internal transfer in the firms best interests?)