Bend Corporation consists of three decentralized divisions—Grant Division, Able Division, and Facet Division. The division managers are evaluated and rewarded based on their division’s profit. They each can choose to sell their products to outside customers or to sell their products to other divisions within the company. They also have the authority to set their own selling prices to outside customers and to negotiate transfer prices with other divisions.

The manager of the Able Division is considering two alternative orders:

Alternative 1:

The Able Division could sell 2,000 motors to the Facet Division for a transfer price of $1,600 per motor. To manufacture each motor, Able would buy one component part from Grant Division at a transfer price of $400 per unit. Able would then further process each part that it receives from Grant at a variable cost of $450 per unit. In addition, Able would use five machine-hours to complete each motor. It’s fixed manufacturing overhead rate is $23 per machine-hour.

Grant incurs a variable cost of $200 per unit before selling each part to Able for $400. It also uses 2.5 machine-hours to manufacture each part that it sells to Able. Grant has a fixed manufacturing overhead rate of $38 per machine-hour.

If Able declines this opportunity (and pursues alternative 2 as described in the next paragraph), the Facet Division will buy 2,000 motors from Waverly Coporation for a price of $1,600 per motor. To produce each motor, Waverly would buy a component part from Grant Division for $350 per unit. Grant would use 2.5 machine-hours to make each part; however, because the part differs from the one it would produce for Able, the variable cost per unit is only $175 per unit.

Alternative 2:

The Able Division could sell 2,500 motors to Tech Corporation for a price of $1,200 per motor. To manufacture each unit of this particular motor, Able would buy one component part from Grant Division at a transfer price of $200 per unit. From Grant’s perspective, this part would have a variable cost per unit of $100 and it would require two machine-hours to produce. Able would further process each part that it receives from Grant at a variable cost of $470 per unit. Able would also use four machine-hours to complete each motor.

Able Division’s plant capacity is limited; therefore, it can only choose one of the two alternatives. The company’s total general fixed overhead would not be affected by this decision.

Required:

1. If the manager of the Able Division wants to maximize the division’s profits, which alternative should be accepted—the order from the Facet Division or the order from Tech Corporation? Support your answer with computations.

2. Which of the two alternatives will maximize profits for the company as a whole? Support your answer with computations.