Gorgon Group plc is a manufacturer with a divisional structure. The Odeen division makes a single product which it sells outside the Gorgon Group as well as to the Trey division. Odeen’s product has a variable cost of £17 a unit and its total annual fixed costs are £480,000. It sells 30,000 units externally at £40 each and 10,000 to Trey at £34 each. For its internal profit calculations, Odeen allocates 20% of total fixed costs to Trey and 80% to external sales. Trey has been approached by an external supplier, Hexup Ltd, which is offering a virtually identical product to that currently purchased from Odeen at a price of £30 each.

Tasks:
a) If Trey refuses Hexup’s offer, calculate Odeen’s annual profit and analyse it between intra-group and external activities

b) If Trey buys its total requirement from Hexup and Odeen cannot replace the lost sales, what will be the effect on the profits of (1) Odeen and (2) Gorgon?
c) If Odeen refuses to match Hexup’s price and Trey buys its total requirement from Hexup, how many extra external sales would Odeen have to make to avoid any reduction in its profit?
d) If Trey decides to purchase half its requirement from Hexup, what effect will this have on Gorgon’s profit?
e) If Odeen agrees to match Hexup’s price of £30 provided Trey still buys 100% of its requirement from it, what effect will this have on Gorgon’s profit?
f ) Advise Gorgon Group regarding this situation.