Division X Has Asked Division K of the Easton Company

Essay

Division X has asked Division K of the Easton Company to supply it with 5,000 units of part L433 this year to use in one of its products. Division X has received a bid from an outside supplier for the parts at a price of $26.00 per unit. Division K has the capacity to produce 30,000 units of part L433 per year. Division K expects to sell 26,000 units of part L433 to outside customers this year at a price of $30.00 per unit. To fill the order from Division X, Division K would have to cut back its sales to outside customers. Division K produces part L433 at a variable cost of $21.00 per unit. The cost of packing and shipping the parts for outside customers is $2.00 per unit. These packing and shipping costs would not have to be incurred on sales of the parts to Division X.
Required:
a. What is the range of transfer prices within which both the divisions' profits would increase as a result of agreeing to the transfer of 5,000 parts this year from Division K to Division X?
b. Is it in the best interest of the Easton Company overall for this transfer to take place? Explain.