Federated Manufacturing Incorporated (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 13,000 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 18,000 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 800 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 $ 245 Variable manufacturing costs 170 Price to outside buyers 235 Data on part 88461: Variable manufacturing costs $ 65 Sales price 95 Other Suppliers of Part 236711: Advance Micro Incorporated, price $ 230 Admiral Electric, price 240

Required: 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?

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? Would the correct transfer price change?