Question 5:

Federated Manufacturing Inc. (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 10,000 units of part 23-6711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly. The commercial division is expanding its production and now wants to increase its purchases of part 23-6711 to 15,000 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon.

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The commercial division can buy part 23-6711 from Advanced Micro Inc. or from Admiral Electric, a customer of the industrial division now purchasing 650 units of part 88-461. The industrial division's sales to Admiral would not be affected by the commercial division's decision regarding part 23-6711.

Industrial division: Data on part 23671 1: Price to commercial division Variable manufacturing costs Price to outside buyers Data on part 88461: Variable manufacturing costs Sales price Other suppliers of part 236711: Advance Micro Inc., price Admiral Electric, price $185 155 205 $ 65 95 $200 210