Woldemort Computers makes microprocessor chips and personal computers (PCs). Its Microprocessor Division currently sells microchips used in home computers. The PC Division purchases a similar chip from Comet Industries (an external supplier) for $240 per chip and buys all the other necessary parts from other outside vendors to assemble personal computers. Both divisions are run as profit centers. The cost and market data below, as well as additional financial information, pertain to the two divisions:

Microprocessor

DivisionPC Division

Sales in units50,000 chips40,000 PCs

Average unit selling price$250 per chip$1,000 per PC

Variable costs per unit$100 per chip$720 per PC*

Total fixed costs$3,000,000$1,500,000

Operating assets$30,000,000$10,000,000

*Variable costs per PC excludes cost of chip

Assume that the Microprocessor Division can produce 80,000 chips at full capacity but consistently has had demand for only 50,000 chips from external customers. Thomas Ryddle, manager of the Microprocessor Division, is concerned about the significant unused capacity of the division. Woldemort's CFO proposed utilizing excess capacity to transfer chips from the Microprocessor Division to the PC Division. Doing so would require a small tweak to the chips currently produced by the Microprocessor Division and would increase variable costs per chip by $20. If the firm were to arrange an internal transfer of chips, the PC Division would require 40,000 chips per year, and it would not be able to accept a partial order.

1. Because the company has never done internal transfers, it has no established transfer pricing policy. Without a policy in place, the CFO decides to mandate the transfer and sets a price of $160 per chip for all 40,000 chips. By how much would the firm's total profits improve compared to the status quo (i.e., no transfer)? By how much would each division's profits improve compared to the status quo?