Bored Boards (BB) Is a Plywood Manufacturing Company

Essay

Bored Boards (BB) is a plywood manufacturing company. BB has two main divisions of product types: Construction Plywood (a rougher product with more knots and blemishes) and Project Plywood (sold for constructing cabinetry and other finished products). The Project Plywood division has the option to purchase the needed panels from the Construction Plywood department or to choose an outside supplier (depending on the agreed-upon transfer price). Extra demand for the following month is projected to be 300 panels of Project Plywood. However, the Construction Plywood department is already producing at full capacity: to meet this demand, the Construction Plywood department would need to shift production from current projects, and management estimates that $30,000 in contribution margin would be lost as a result.
The following are the expected costs for the extra production in the Construction Plywood department:
Direct Materials: $8,000
Direct Labor: $10,000
Variable Overhead: $18,000
An outside supplier has offered to produce the needed panels for $200/panel.
Should the Project Plywood department purchase the panels from the Construction Plywood department or from the outside supplier?