The Shoe Company has three specialized divisions. The Casual Shoe Division has asked the Sole Division to supply it with a large quantity of soles. The Sole Division is currently at capacity. The Sole Division sells soles outside for $5.00 each. The Casual Shoe Division, which is operating at 50 percent capacity, has offered to pay $4.00 per sole. The Sole Division has a variable cost of $3.60 per sole. The Casual Shoe Division has the following cost structure:

Direct materials, except soles $60.00

Soles 4.00

Conversion costs 36.00

Fixed overhead 20.00

Total cost per pair of shoes $120.00

The manager of Casual Shoe believes that the $4 price from Sole is necessary if the division is to compete in the market for casual shoes.

Required:

a. As manager of Sole Division, would you recommend that your division supply the soles to Casual Shoe? Why?

b. Would it be desirable for the division to supply Casual Shoe with the soles for $4 assuming the Sole Division had excess capacity? Why?

c. What would be the corporate position assuming the Sole Division has excess capacity?