Advanced Manufacturing Inc. (AMI) produces electronic components in three divisions: industrial, commercial, and consumer products. The commercial products division annually purchases 10,000 units of part 23-6711, which the industrial division produces for use in manufacturing one of its own products. The commercial division is growing rapidly. The commercial division is expanding its production and now wants to increase its purchases of part 23-6711 to 15,000 units per year. The problem is that the industrial division is at full capacity. No new investment in the industrial division has been made for some years because top management sees little future growth in its products, so its capacity is unlikely to increase soon.
The commercial division can buy part 23-6711 from HighTech Inc. or from Britton Electric, a customer of the industrial division, now purchasing 650 units of part 88-461. The industrial division's sales to Britton would not be affected by the commercial division's decision about part 23-6711.
Industrial division
Data on part 23–6711:
Price to commercial division ...... $185
Variable manufacturing costs ........ 155
Price to outside buyers ......... 205
Data on part 88–461:
Variable manufacturing costs ....... $ 65
Sales price ............. 95
Other suppliers of part 23–6711:
HighTech Inc., price ......... $200
Britton Electric, price .......... 210
Required
1. What is the proper decision regarding where the commercial division should purchase the additional 5,000 parts and what is the correct transfer price?
2. Assume that the industrial division’s sales to Britton would be cancelled if the commercial division does not buy from Britton. What would be the unit cost to AMI in this case, and would the desired transfer price change?
3. What are the strategic implications of your answer to requirement 1? How can AMI become more competitive in one or more of its divisions?