E & B Company has two divisions, Processing and Finishing. Finishing has been purchasing certain products from Processing at a price of $80 per unit. (A unit consists of 100 yards of material.) Processing has announced that, starting next month, it will raise its price to $100 per unit. As the manager of Finishing, you object to this price and are planning to purchase these units of material from outside suppliers at a price of $85 per unit. The accounting department offers the following information about Processing’s operations:

Units produced for Finishing Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Variable production costs per unit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60

Indirect fixed costs allocated to the Processing Division . . . . . . . . . . . . . . . . . . . . . . . $50,000

Normal profit per unit in Processing Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15

If Finishing buys from outside suppliers, the facilities used by Processing to manufacture these units for Finishing will remain idle.

Answer the following questions:

1. If Processing is successful in imposing the $100 price and Finishing elects to buy from outside suppliers, what impact does this action have on the overall profit of E & B?

2. Explain why the variable production costs, the fixed costs, and the normal profit are, or are not, each relevant to this decision. (You are not being asked to discuss whether the $100 price is an appropriate price or whether the division managers should be allowed to maintain an autonomous posture in this decision.)

3. What additional factors should E & B’s top management consider in resolving this matter?