Thai Company Has Two Divisions Organized as Profit Centers: Redmon

Thai Company has two divisions organized as profit centers: Redmon and Tomlin.Thai expects the following results: $$\begin{array} { | l | r | r | } \hline & \text { Reckon } & \text { Tomlin } \\\hline \text { Sales } & & \\\hline \text { Redmon: } ( 10,000 \times \$ 16 ) & \$ 1,600,000 & \\\hline \text { Tomlin: } ( 250,000 \times \$ 7.20 ) & & \$ 1,800,000 \\\hline \text { Variable costs } & 1,360,000 & 1,000,000 \\\hline \text { Contribution margin } & \$ 240,000 & \$ 800,000 \\\hline \text { Fixed costs } & 160,000 & 460,000 \\\hline \text { Profit } & \$ 80,000 & \$ 340,000 \\\hline\end{array}$$
Included in Redmon's costs are 100,000 units of a subcomponent purchased from an outside supplier for $4.50.The managers have recently initiated negotiations for Tomlin to supply the components to Redmon.Tomlin has a total capacity of 400,000 units.Required:
a.Would Thai Company prefer the subcomponent used by Redmon to be purchased internally from Tomlin or from the outside vendor? What would be the profit impact?
b.What would be the maximum and minimum transfer prices?

Correct Answer:

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a.Internal cost = variable cost = $1,00...

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