Division Chas, in thepast, always purchased its requirement of a particulartractor-engine component from Division A.However, when informed that Division A is increasing its selling price to $145, DivisionC's manager decides to purchase the engine component from external suppliers.

Division C can purchase the component for $120 per unit in the open market. Division A insists that because of the recent installation of some highly specialized equipment and the resulting high depreciationcharges, it will not be able to earn an adequate return on its investment unless it raises its price. DivisionA's manager appeals to top management of Michael for support in the dispute with Division C and supplies the following operatingdata:

C's annual purchase of thetractor-engine component

1,300 units

A's variable cost per unit of thetractor-engine component

$110

A's fixed cost per unit of thetractor-engine component

$30

Requirement 1. Assume that there are no alternative uses for internal facilities of Division A. Determine whether the company as a whole will benefit if Division C purchases the component from external suppliers for $120 per unit. What should the transfer price for the component be set at so that division managers acting in their owndivisions' best interests take actions that are in the best interest of the company as awhole?

Begin by completing the table below to calculate the net cost(benefit) to the company as a whole. (Enter a net benefit using parentheses or a minussign.)

Less:

Net cost (benefit) to company as a whole

The company as a whole

will

will not

benefit if Division C purchases the component from external suppliers for $120 per unit.

What should the transfer price for the component be set at so that division managers acting in their owndivisions' best interests take actions that are in the best interest of the company as awhole?

The transfer price should be set

at $110

at $120

at $140

at $145

between $110 and $120

between $110 and $145

between $120 and $140

between $140 and $145

.

Requirement 2. Assume that internal facilities of Division A would not otherwise be idle. By not producing the 1,300 units for DivisionC, DivisionA's equipment and other facilities would be used for other production operations that would result in annualcash-operating savings of $25,000. Should Division C purchase from externalsuppliers? Show your computations.

Begin by completing the table below to calculate the net cost(benefit) to the company as a whole. (Enter a net benefit using parentheses or a minussign.)

Less:

Net cost (benefit) to company as a whole

Division C

should

should not

purchase the component from external suppliers for $120 per unit.

Requirement 3. Assume that there are no alternative uses for DivisionA's internal facilities and that the price from outsiders drops $35. Should Division C purchase from externalsuppliers? What should the transfer price for the component be set at so that division managers acting in their owndivisions' best interests take actions that are in the best interest of the company as awhole?

Begin by completing the table below to calculate the net cost(benefit) to the company as a whole. (Enter a net benefit using parentheses or a minussign.)

Less:

Net cost (benefit) to company as a whole

In thisscenario, Division C

should

should not

purchase the component from external suppliers.

What should the transfer price for the component be set at so that division managers acting in their owndivisions' best interests take actions that are in the best interest of the company as awhole?

The transfer price should be set

at $110

at $120

at $140

at $145

between $110 and $120

between $110 and $145

between $120 and $140

between $140 and $145

.