TK Electronics is a manufacturer with two departments: Computer Chips and Cell Phones.
The computer chip that is produced in the Chips Department can be sold to customers at $5.00 per chip. The costs associated with the computer chips are as follows:
Variable manufacturing costs...................................................................... $ 2.40
Variable selling and administrative costs.................................................... $ 0.80
Capacity........................................................................................... 500,000 units
Current production........................................................................... 500,000 units
The Cell Phone Department has been purchasing the chips that they need for $2.75 per chip from Chips R Us, but the manager was thinking that if the Chips Department could supply the chips for less than what Chips R Us is asking, then they would arrange a transfer between departments instead of giving the business to an external company.
Requirements
1. Should the Chips Department supply the chips to the Cell Phone Department under these circumstances?
2. If the Chips Department had sufficient capacity, would this make a difference?