Please assist with question 2.
Exercise 3. ComfyCycle Inc. ComfyCycle Inc. prodUces seat cUshions for high-end bicycles. The company is made Up of two divisions. Division Padding prodUces the padding for the seat cushions while Division Cover produces seat covers and sells the complete seat cushions to customers. One seat cushion requires one padding and one cover. The paddings are the main selling point of the seat cushions, clue to their new and patented foam technology. Many outside manufacturers are trying to buy the paddings from the company to produce their own bicycle seats. But the final product of ComfyCycle, the seat cushions, are also very sought after by high-end bicycle manufacturers. The company cannot catch Up with the demand for both. Production capacities, costs, and market price are listed below. Table 2. O - eratin_ data Division Paddin Division Cover Expected market demand [unit] 300 000 200,000 Market price [e per unit] \" Production capacity [units] 200,000 200,000 At the end ofthe year, the manager of Division Padding is approached by a bicycle leasing company that Wants to acquire 20,000 seats for their own bicycles and 5,000 additional stand-alone paddings for later replacement. But the leasing company requires the seats and repiacement-paddings in a different form, to fit their existing stools. To produce the new form, division Padding would need to invest 250,000 '8 in new machinery. In contrast, Division Cover does not have any adjustment costs since the cover canjust be cut differently, i.e. it does not require new equipment. The new seat form is smailer and lowers the variable costs per unit for both divisions [see table 3}. The leasing chain made a non-negotiable "take it or leave it\" offer of 35 per padding and 100 'E for the seats. The manager can either fully accept or completely reject the offer (no partial fulfiilrnent}. Table 3 summarizes the production situation and offer. The company has decIdEd to keep Using the minimum transfer price. Division managers are still evaiuated by division-specific profit Table 3. O: eratin data Division Division Hotel order [unit] 5,000 20,000 Offered price [e per unit] \" Variable costs [e per unit] Left-over roduction ca - acity [units] 25,000 20,000 2. Transfer prices and performance measurements a} Please calculate the prot the company wouid make on the offer. Is the offer profitable for the company as a whole? b) Calculate the incremental costs of one padding for the offer. c) Calculate the division-specic profit of Division Padding for the order. Will the division manager of Division Padding decide to make the investment and accept the offer of the leasing company? Is his decision goal congruent? Explain your
