Miller Company has two divisions, each of which is operated as a profit center. The Wheel Division charges the Molding Division $35 per unit for each unit transferred to them. Other data for the Wheel Division are as follows:
Variable cost per unit ........ $ 30.00
Total fixed costs ........... $10,000
Annual sales to Molding ....... 5,000 units
Annual sales to outside customers .... 50,000 units
The Wheel Division is planning to raise its transfer price to $50 per unit. The Molding Division can purchase units at $40 each from outside vendors, but doing so would idle the Wheel Division’s facilities that are now committed to producing units for the Molding Division. The Wheel Division cannot increase its sales to outside customers because there is not sufficient demand.
From the perspective of the company as a whole, from whom should the Molding Division acquire the units, assuming the Molding Division’s market is unaffected?