Federated Manufacturing Incorporated (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 10,000 units of part 236711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly; it is expanding its production and now wants to increase its purchases of part 236711 to 15,000 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon.

The commercial division can buy part 236711 from Advanced Micro Incorporated or from Admiral Electric, a customer of the industrial division now purchasing 650 units of part 88461. The industrial division's sales to Admiral would not be affected by the commercial divisions decision regarding part 236711.

Industrial Division:
Data on part 236711:
Price to commercial division	$ 185
Variable manufacturing costs	155
Price to outside buyers	205
Data on part 88461:
Variable manufacturing costs	$ 65
Sales price	95
Other Suppliers of Part 236711:
Advance Micro Incorporated, price	$ 200
Admiral Electric, price	210

1. What is FMIs unit cost if the commercial division buys its additional 5,000 units of part 236711 from the industrial division? From FMIs perspective, from which supplier (industrial division, Advance Micro Incorporated, or Admiral Electric) should the commercial division buy the additional units? If the sale were made internally, what would the correct transfer price be?

question 1 answer

	Cost to FMI
Internal Sale	$205	per unit
Buy from Advanced Micro	$200	per unit
Transfer pricenot attempted	$205	per unit

2. Assume that the industrial divisions sales to Admiral will be canceled if the commercial division does not buy from Admiral. What would be FMIs unit costs of (a) internal transfer and (b) purchasing from Admiral in this case? The correct transfer price would not change. (Round your answer to 2 decimal places.)

a.	Unit Cost from Internal Sale		per unit
b.	Unit Cost if buy from Admiral		per unit
	Transfer price change	No

3. What are the strategic implications of your answer to requirement 1? How can FMI become more competitive in one or more of its divisions?