Question 2 Noble Gases has an oil and a chemical department. The oil department produces gasoline and the chemical department produces chemicals. The chemical department owns a processing factory that is situated next to the oil department's factory. The chemical department believes they can produce and sell 50,000,000 kilograms of chemicals per year and will have excess capacity at this production level. The Chemical department's expected revenues and costs are as follows: Selling price for chemicals Direct materials Variable production costs Fixed production costs Per kilogram $0.30 ? 0.03 0.05 The Oil department's expected revenues and costs to produce gas are as follows: Selling price for gasoline Direct materials Variable production costs Fixed production costs Per kilogram $0.16 0.06 0.02 0.07 With a bit of extra processing, gasoline can be an input into the chemical department's chemicals. This means that the oil department could provide direct materials to the chemical department. But for every kilogram of direct materials that the Oil Department produces for the chemical department, it will forgo selling a kilogram of gasoline. The following are Oil's expected revenues and costs for the production of direct materials for the Chemical Department (these costs include the costs of refining the oil into gasoline): Selling price (to Chemical) Direct materials Variable production costs Fixed production costs Per kilogram $? 0.06 0.04 0.09 Required: a. Considering the impact on the entire company, should chemicals be produced this year? Why or why not? b. What is the maximum transfer price that the Chemical department would be willing to pay to the Oil Department for processed gasoline? c. Would the Chemical department be willing to pay the maximum transfer you calculated in part b? Why or why not? d. What is the minimum transfer price that the Oil Department would be willing to receive for processed gasoline? e. What transfer price would be fair to both divisions? Explain.