Bern Equipament, SA, a Swiss transportation equipment manufacturer, is heavily decentralized. Each division head has full authority on all decisions regarding sales to internal or external customers. The Graubunden division has always acquired a certain equipment component from the Ticino division. The Ticino division recently acquired specialized equipment that is used primarily to make this component. Because of the new depreciation charges on the equipment, the Ticino division has informed the Graubunden division that the unit price will be increased to CHF 325. However, the Graubunden division’s management has now decided to purchase the component from outside suppliers at a price of CHF 300.

The Ticino division has supplied the following production cost data for this component:

1. Suppose there are no alternative uses of the Ticino facilities and that fixed costs will continue if Ticino no longer produces the component for Graubunden. Will the company as a whole benefit if the Graubunden division buys from the outside suppliers for CHF 300 per unit? Show computations to support your answer.

2. Suppose there is an alternative use for the Ticino facilities. If the Ticino facilities are used to produce the component for the Graubunden division, the Ticino division will give up a contribution of CHF 75,000 from this alternative use. Should the Graubunden division purchase from outsiders at CHF 300 per unit?

3. Suppose that there are no alternative uses for Ticino’s internal facilities and that the outsiders’

selling price drops by CHF 30 to CHF 270. Should the Graubunden division purchase from outsiders?

4. As the president, how would you respond if the Ticino division manager’s requests that you require the Graubunden division to purchase the component from Ticino? Would your response differ depending on the specific situations described in numbers 1–3 above? Why?

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Annual production of component (all for sale to Graubunden division) Ticino's variable costs per unit Ticino's fixed costs per unit 3,000 units CHF 280 CHF 30