The Enviro division of Solar Sun produces solar panels, 20 per cent of which are sold to the Energy Plus division of Solar Sun and the remainder to outside customers. Solar Sun treats its divisions as profit centres and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as the transfer price. Enviro division’s estimated sales and standard cost data for 2019, based on its full capacity of 100 000 units are as follows:

Enviro has an opportunity to sell the 20 000 units to an outside customer at a price of $75 per unit on a continuing basis. Energy Plus can purchase its requirements from an outside supplier for $85 per unit.

Required

Assuming that Enviro division desires to maximise its gross margin, should Enviro accept the new customer and drop its sales to Energy Plus for 2019? Why?

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Energy Plus Outsiders $ 900 000 (900 000) (300 000) $(300 000) Sales $8 000 000 Variable costs (3 600 000) (1 200 000) $3 200 000 Fixed costs Gross margin Unit sales 20000