The Nicholson and Cage Divisions Are Part of the Same

Essay

The Nicholson and Cage Divisions are part of the same company. Currently the Cage Division buys a part from Nicholson for $82. The Nicholson Division wants to increase the price of the part it sells to Cage to $100. Cage Division can buy the part from an outside supplier for $94. The cost data for the Nicholson Division is as follows: $\begin{array}{ll}\text { Direct materials } & \$ 2550 \\\text { Direct labor } & 3250 \\\text { Variable overhead } & 2250 \\\text { Fixed overhead } & 9.60\end{array}$ Required:
a. If Nicholson ceases to produce the parts for Cage, it will be able to avoid one- fourth of the fixed manufacturing overhead. The Nicholson Division has excess capacity but no alternative uses for its
facilities.
From the standpoint of the company as a whole, should Cage continue to buy from Nicholson or start to
buy
from the outside supplier?
b. What should the transfer price for the part be?