Zuzu Corporation is a decentralized organization which has two divisions: Purcell and Byrd. The Purcell division manufactures the product Alium, which is then transferred to the Byrd division. Alium is further processed by the Byrd division into a product called SpAliurn and sold to customers at a price of 140 per unit Purcell is currently required by Tallis management to transfer its total yearly output of 50,000 units of Alium to Byrd at full cost (so including allocated fixed costs) plus a 10% mark-up. The market price for Alium (as supplied by Purcell) is 80. Production of one unit of Alium by Purcell requires variable costs of 40; the fixed costs of Purcell are 1 million per year. The processing of Alium into SpAlium by Byrd requires additional variable costs per unit of 36 per unit; Byrd's fixed costs are 1.1 million.

b Calculate the operating income (profit) for each division using (1) the cost-based transfer price (so full cost plus a 10% mark-up), and (2) the market price for Alium (so you need to calculate four profit numbers). Tallis management decides to increase the level of decentralization. Both divisions are free to go to the market for their Alium, either to sell or to buy it; they are not required to engage in an intemal transfer between Purcell and Byrd if they do not want to do this. If Purcell would sell its Alium at 80, it would incur variable marketing costs of 3 per unit. Byrd would incur 4 in variable purchasing costs if it would buy Alium on the market rather than from Purcell. Byrd's yearly demand for Alium is expected to remain 50,000 units; both divisions have a maximum capacity of 60,000 units per year.