Exercise 18.24(Ed. 3:16.22)

Enviro division of Solar Sun produces solar panels, 20 per cent of which are sold to the Energy Plus division of Solar Sun and the remainder to outside customers. Solar Sun treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as transfer price. Enviro division's estimated sales and standard cost data for 2019, based on its full capacity of 100,000 units are as follows:

Energy Plus Outsiders

Sales $900,000 $8,000,000

Variable costs (900,000) (3,600,000)

Fixed costs (300,000) (1,200,000)

Gross margin $(300,000) $3,200,000

Unit sales 20,000 80,000

Enviro has an opportunity to sell the 20,000 units to an outside customer at a price of $75 per unit on a continuing basis. Energy Plus can purchase its requirements from an outside supplier for $85 per unit.

Required

Assuming that Enviro division desires to maximise its gross margin, should Enviro accept the new customer and drop its sales to Energy Plus for 2019? Why?