Question 4 (Total: 20 marks)

Heisenberg Corporation has a Moldings Division that does molding work of various types. The company's Machine Products Division has asked the Moldings Division to provide it with 20,000 special moldings each year on a continuing basis. The special moldings would require $10 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $29 per unit for the moldings.

In order to have time and space to produce the new moldings, the Moldings Division would have to cut back production of another molding: the Blue4, which it presently is producing. The Blue4 sells for $30 per unit, and requires $12 per unit in variable production costs. Boxing and shipping costs of the Blue4 are $4 per unit. Boxing and shipping costs for the new special molding would be only $1 per unit. The company is now producing and selling 100,000 units of the Blue4 each year. Production and sales of this molding would drop by 20% if the new molding is produced.

Required:

1. What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 20,000 moldings per year from the Moldings Division to the Machine Products Division?
1. Is it in the best interests of Heisenberg Corporation for this transfer to take place? Explain.