XYZ Inc. (XYZ) is involved in the manufacturing and sales of small electrical items.It has three segments: Corporate, SME (small and medium enterprises), and Retail.The segments largely function as decentralized autonomous units. The segments are primarily evaluated on the basis of 'profit before tax'.

The SME segment annually purchases from the Corporate segment 10,000 units of "low voltage circuit breakers (LVCB)", which the Corporate segment also produces for use in manufacturing one of its own products.The SME segment wants to increase its purchases of LVCB to 15,000 units per year.

The problem is that the Corporate segment is at full capacity: satisfying its own demand for LVCB, selling 10,000 units of LVCB to the SME segment, and selling another 9,000 units of LVCB to the external market. Corporate segment estimates that it could easily sell 19,000 units in the external market.

On one hand, internal transfers from the Corporate segment to SME segment do not incur any variable packaging costs on the transfers. On the other hand, the Corporate segment can sell the units to outside parties at a price greater than the current transfer price charged to SME.

SME can buy a unit that is equivalent to LVCB from two external suppliers: ATronics or B Electricals. ATronics is also a customer of the Corporate segment and now purchases 650 units of 'medium voltage circuit breakers (MVCB)' from the Corporate segment. B Electricals is not a customer of the Corporate segment.

Corporate Segment: Data on LVCB: Current transfer price to SME Variable manufacturing costs (excluding packaging) Variable packaging costs Sales Price to outside buyers Data on MVCB: Variable manufacturing costs (excluding packaging) Variable packaging costs Sales price Other external suppliers of equivalent LVCB units: B Electricals, price We price $185 147 205 $59 95 $200 210