Finnish Corporation Has a Supply Division That Does Work for Other

question 24

Essay

Finnish Corporation has a Supply Division that does work for other divisions in the company as well as for outside customers. The company's Custodial Products Division has asked the Supply Division to provide it with 10,000 special parts each year. The special parts would require $15.00 per unit in variable production costs.
The Custodial Products Division has a bid from an outside supplier for the special parts at $29.00 per unit. In order to have time and space to produce the special parts, the Supply Division would have to cut back production of another product - the H56 that it is currently producing. The H56 sells for $32.00 per unit and requires $19.00 per unit in variable production costs. Packaging and shipping costs of the H56 are $3.00 per unit. Packaging and shipping costs for the new special part would be only $1.00 per unit. The Supply Division is currently producing and selling 40,000 units of the H56 each year. Production and sales of the H56 would drop by 20% if the new special part is produced for the Custodial Products Division.
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 10,000 special parts per year from the Supply Division to the Custodial Products Division?
(b) Is it in the best interests of Finnish Corporation for this transfer to take place? Explain.

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Definitions:

Market Structure

The organization and characteristics of a market, including the level of competition, number of producers, and type of products.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded for a given period.

Elastic

Describes the responsiveness of demand or supply to changes in price or income.

Free Entry

A market condition where there are no barriers or restrictions preventing new competitors from joining the market.