The JasonLowell Corporation, manufacturer of tractors and other heavy farm equipment, is organized along decentralized product lines, with each manufacturing division operating as a separate profit center. Each division manager has been delegated full authority on all decisions involving the sale of that division's output both to outsiders and to other divisions of JasonLowell. Division C has in the past always purchased its requirement of a particular tractor-engine component from division A. However, when informed that division A is increasing its selling price to $140, division C's manager decides to purchase the engine component from external suppliers. Division C can purchase the component for $120 per unit in the open market. Division A insists that, because of the recent installation of some highly specialized equipment and the resulting high depreciation charges, it will not be able to earn an adequate return on its investment unless it raises its price. Division A's manager appeals to top management of JasonLowell for support in the dispute with division C and supplies the following operating data:

C's annual purchases of the tractor-engine component	1,100 units
A's variable cost per unit of the tractor-engine component	$100
A's fixed cost per unit of the tractor-engine component	$25

Requirement 1. Assume that there are no alternative uses for internal facilities of division A. Determine whether the company as a whole will benefit if division C purchases the component from external suppliers for $120 per unit. What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are in the best interest of the company as a whole?

Begin by completing the table below to calculate the net cost (benefit) to the company as a whole. (Enter a net benefit using parentheses or a minus sign.)

(Purchase costs paid to external suppliers / savings in fixed costs / Savings in variable costs)
Less: (purchase costs paid to external suppliers / savings in fixed costs / savings variable costs)
Net cost (benefit) to company as a whole

The company as a whole (will / will not) benefit if division C purchases the component from external suppliers for $120 per unit.

What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are in the best interest of the company as a whole?

The transfer price should be set (at $100 / at $120 / at $125 / at $140 / between $100 and $120 / between $100 and $140 / between $120 and $125 / between $125 and $140)

.Requirement 2. Assume that by not producing the 1,100 units for division C, division A's equipment and other facilities would be used for other production operations that would result in annual cash-operating savings of $16,000. Should division C purchase from external suppliers? Show your computations.

Begin by completing the table below to calculate the net cost (benefit) to the company as a whole. (Enter a net benefit using parentheses or a minus sign.)

(purchase costs paid to external suppliers / savings due to A's resources assigned to other operations / savings in fixed costs / savings in variable costs)

Less: (purchase costs paid to external suppliers / savings due to A's resources assigned to other operations / savings in fixed costs / savings in variable costs)

(purchase costs paid to external suppliers / savings due to A's resources assigned to other operations / savings in fixed costs / savings in variable costs)

Net cost (benefit) to company as a whole

Division C (should / should not) purchase the component from external suppliers for $120 per unit.

Requirement 3. Assume that there are no alternative uses for division A's internal facilities and that the price from outsiders drops $25. Should division C purchase from external suppliers? What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are in the best interest of the company as a whole?

Begin by completing the table below to calculate the net cost (benefit) to the company as a whole. (Enter a net benefit using parentheses or a minus sign.)

(purchase costs paid to external suppliers / savings in fixed costs / savings in variable costs)
Less: (purchase costs paid to external suppliers / savings in fixed costs / savings in variable costs)
Net cost (benefit) to company as a whole

In this scenario, division C (should / should not) purchase the component from external suppliers.

What should the transfer price for the component be set at so that division managers acting in their own divisions' best interests take actions that are in the best interest of the company as a whole?

(The transfer price should be set at $140 / The transfer price should be set between $120 and $125 / The transfer price should be set between $125 and $140 / There is no transfer in this scenario as Division C should purchase the component from external suppliers)

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