Question
Murray & Company operates two divisions: Arnott and Baxter. Baxter division currently buys 11,000 units of a computer chip C01 (which the division uses to
Murray & Company operates two divisions: Arnott and Baxter.
Baxter division currently buys 11,000 units of a computer chip C01 (which the division uses to manufacture an electronic instrument) from an outside supplier at a price of $21 per unit.
Arnott division produces similar components internally, but it sells currently to an outside company at $24 per unit.
Brita Thunberg, the chief operations officer at Murray & Company, is considering the possibility of Baxter division buying the component C01 internally from Arnott division.
However, Ms. Thunberg is aware that Baxter division can make the purchase only if it gets a reasonable price, and Arnott division can supply all of 11,000 units.
For Arnott division, variable and fixed manufacturing costs per unit (based on total capacity) of C01 are $11 and $5 respectively.
Arnott division spends $2 per unit for sales commission. For internal sales, the company saves the sales commissions.
Question
If Arnott division has a current market demand of 52,000 units of C01,
what should be the minimum production capacity of this division for an internal transfer of C01 to take place?
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