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Federated Manufacturing Inc. (FMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 10,200 units of part 236711, 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 236711 to 15,200 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.

The commercial division can buy part 236711 from Advanced Micro Inc. or from Admiral Electric, a customer of the industrial division now purchasing 660 units of part 88461. The industrial division's sales to Admiral would not be affected by the commercial divisions decision regarding part 236711.

Industrial Division:
Data on part 236711:
Price to commercial division	$	189
Variable manufacturing costs		156
Price to outside buyers		207
Data on part 88461:
Variable manufacturing costs	$	65
Sales price		95
Other Suppliers of Part 236711:
Advance Micro Inc., price	$	202
Admiral Electric, price		212

Required:

1. What is the proper decision regarding where the commercial division should purchase the additional 5,000 parts, and what is the correct transfer price?

2. Assume that the industrial divisions sales to Admiral will be canceled if the commercial division does not buy from Admiral. What would be the unit cost to FMI in this case, and would the desired transfer price change?