Mary manufacturers internet routers, which are devices that direct internet traffic. There are three major components to a router: ports, a bus, and a processor. Currently, Mary manufacturers the three major components, and also assembles the routers by combining the major components with power supplies and other minor components. While Mary must do the final assembly itself, it would be possible to buy each of the three major components from outside suppliers (or have them produced by contract manufacturers). Buying ports from another supplier would cost $33 for enough ports to make a router. Buying buses would cost $15 per router and buying processors would cost $28 per router.

Mary is divided into four major divisions. Monthly profit and loss for the four divisions is given below.All figures are reported in thousands of dollars.

Assembly

Ports

Buses

Processors

Materials

950

320

150

260

Labor

289

45

36

28

Direct overhead

79

60

35

22

Corporate overhead

50

50

50

50

Division costs

1,368

475

271

360

Division revenues

2,542

320

150

260

Division net income

1,174

-155

-121

-100

The following notes apply to this table:

• The cost and revenue numbers in the table above are for monthly production of 12,000 routers (and the ports, buses, and processors necessary to produce that number of routers).
• Mary's component divisions (namely, ports, buses, and processors) transfer their products internally to the final assembly division at the cost of materials.
• This transfer pricing rule implies that a substantial part of the materials expenditure in the assembly division is internal transfer payments to the component divisions. Specifically, in the table above, the three component divisions together have total materials costs of $730,000 per month ($320,000 in ports plus $150,000 in buses plus $260,000 in processors). Thus, the $950,000 monthly materials expense for the final assembly division, is comprised of $730,000 in payments to the component's divisions, and $220,000 in additional incremental expenditure.
• The transfer pricing rule also implies that the revenue accounted to each of the component divisions is equal to its materials costs. In the table above, revenues for ports, buses, and processors are $320,000, $150,000, and $260,000 respectively.
• Labor and materials are variable costs.
• Direct overhead is made up of depreciation and capital expenditure for the equipment actually used in each division. In each division, one quarter of the direct overhead would be avoidable in the short run if the division produced no output, one half could be recovered in the long run if the division were shut down and the equipment were sold, and one quarter is completely unrecoverable.
• Corporate overhead is avoidable only if the entire firm were to exit the business.

Should Mary continue to manufacture its own ports in the short run? In the long run? Explain.

Should Mary continue to manufacture its own buses in the short run? In the long run? Explain.

Should Mary continue to manufacture its own processors in the short run? In the long run? Explain.