Kelowna Company has two divisions, A and B. Division A manufactures 12,000 units of product per month. The cost per unit is calculated as follows:
Variable costs.................. $10
Fixed costs....................... 20
Total cost....................... $30
Division B uses the product created by Division A. No outside market for Division A's product exists. The fixed costs incurred by Division A are allocated headquarters-level facility-sustaining costs. The manager of Division A suggests that the product be transferred to Division B at a price of at least $30 per unit. The manager of Division B argues that the same product can be purchased from another company for $26 per unit and requests permission to do so.
Required
a. Should Kelowna allow the manager of Division B to purchase the product from the outside company for $26 per unit? Explain.
b. Assume you are the president of the company. Write a brief paragraph recommending a resolution of the conflict between the two divisional managers.